Another potential policy dilemma beckons

28 Aug, 2020 - 00:08 0 Views

eBusiness Weekly

Misheck Ugaro

To let go or to manage the auction exchange rate! Now this is the question policy makers are facing going forward.

The success of the foreign exchange auction trading system has surpassed many economic agents that had misgivings on the efficacy of the system in taming the unprecedented run away exchange rate.

The local currency had failed to hold ground from the day of its re-introduction and as a result inflation galloped in tandem peaking at above 838 percent. The few pockets of doubt and resistance that remain as epitomised by some opaque pricing habits mainly in the retail sector are expected to soon vanish.

The upside

The implementation of the Dutch foreign exchange trading system has already started yielding stable prices. As one example, the Consumer Council of Zimbabwe has gone on record stating that they have started experiencing stable to lower prices of goods. The exchange rate itself has shown signs of stability below the 83 range. This stability is expected to hold and result in the following benefits:

1) Reliable and transparent price discovery

2) The removal of speculative behaviours that caused an artificial exchange rate not supported by fundamentals. This included the creation of electronic money through mobile platforms that pushed demand for foreign currency on the market

3) Stabilising prices with inflation expectations now forecast at sub 300 percent by year end December 2020.

4) Positive balance of payment as exports are growing against a marginal decline in imports due to the weak currency. The impact of Covid-19 notwithstanding.

5) Electronic transactions in RTGS have increased showing the potential for latent demand for the local currency and bodes well for the long term intentions of a full de-dollarisation.

6) The implementation of the correct systems will see a gradual shift from dollarisation back to the local currency in the longer term as people will begin to choose use of local currency in local transactions and only seek forex where they actually need to buy from outside the country

The downside

The above success has potential of strengthening the local currency unit against the United States dollar. A strong local currency unit pauses a different challenge to the authorities. A strengthening currency may hurt exports and in this regard there is a line of thought that justifies the current levels of the exchange rate.

The suggestion is that the rate should not be allowed to strengthen too much. Fundamentals point to a correct rate of around the sub 50s range but the argument is to keep it at the current 80s levels. A strong currency therefore puts the authorities in a conundrum.

In order for the country to remain competitive on the exports market by maintaining the high exchange rate, it is argued that the authorities can achieve this potentially through purchases of currency. On the other hand, achieving this will be at the expense of the general populace. The general populace prefers a strong local currency unit for several reasons including but not limited to:

1) Restoration of the value of lost savings that resulted from currency depreciation

2) The benefits of exports largely accrues to the large exporters namely the mines and other big businesses, which are mainly multi nationals and therefore does not really benefit the masses and they will remain poor.

In addition, buying forex by the authorities also implies injecting more local currency into the market and thereby growing money supply that has been the main driver of the challenges the country faces in the first place. This may become a vicious cycle in the end, hard to break.

Policy choice going forward

At the end of the day, the authorities are left with the question of what to do. 

1) To let go of the market so it can freely determine its own equilibrium even if it means an appreciation of the local currency to the projected 40s level or,

2) To step in and purchase foreign currency to maintain a relatively weak local unit with its attendant social problems. 

It is noted, however, that an appreciation of the local unit is more likely to just restore the value to those who were robbed by depreciation in the first place. It will not necessarily prejudice exporters or even diaspora remittance receivers due to the use of dual currencies as is the current scenario. It is acknowledged that exporters will only lose the abnormal exchange gains they were making from the weak currency instead.

These profits were also admittedly at the disadvantage of savers and the economy as a whole anyway. Economic growth was negative due to falling aggregate demand from a weak currency.

The authorities are therefore left in a quandary and have to weigh the costs and benefits of either decision. A balance has to be found and that protects both the lower and high sides and therefore the interests of all including the masses, business and the economy as a whole.

As it stands, it is recommended that the market be left to determine its equilibrium without any tinkering. Studies of peer countries such as Tanzania and Mozambique are necessary as these have gone through similar phases and the economies are structured more like Zimbabwe with significant SMEs and Informal sectors.

Perhaps the authorities can come up with a transparent way forward that maintains the market confidence that is now being gained where clear targets such as inflation and money supply growth are clearly set and shown to the market with the concomitant periodic reports and updates to allow players to monitor and make decisions. 

Meanwhile, the authorities are urged to review the fiscalisation of forex receipts in order to optimise revenue collections and eliminate the malfeasant practice of double dipping that some retailers are unfortunately undertaking in the shops.

Misheck is a former expatriate banker once based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society. He can be contacted on (263) 777052004/712808140 [email protected] /Linkedin: https://www.linkedin.com/ Twitter: @twitcagan.com

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