Controls will do more harm than good

01 Jun, 2018 - 00:06 0 Views

eBusiness Weekly

Clive Mphambela
Adam Smith, the celebrated economist and philosopher once said: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest”.

Free markets have been proven to work best, especially when governments lets them be. Government should only intervene in the free market in those instances where there is need to address occasional market failure.

It is critical that our Government, should by now understand that, noble as its intentions maybe in making various intervention, controls are ultimately bad for the economy and usually cause more harm than good.

History is replete with examples and lessons that controls, more often than not end up harming the very consumers they seek to protect. Controls in any shape of form, must be avoided at all costs.

As the country stares elections season in a few weeks, there is an increasing disposition or temptation by our Government to try and influence and even control various prices in the economy. From interest rates to bank charges; from prices of fuel, to corn meal, bread and soap.

Exporters are the ones that generate foreign currency and they have the first right of usage for their foreign currency earnings. What is actually required therefore is national and concerted effort to drive up exports growth.

Those entities that are currently lining up for foreign currency are mostly non exporters and it follows that until as a country, we are exporting at the right level, the critical shortage of foreign exchange will persist.

I have heard from many quarters that banks have been accused of sitting on foreign currency applications. This can hardly be true, given the dynamics of regulation and the real levels of demand. Banks have no business sitting on piles of import payments if the foreign currency is available.

Strictly speaking therefore, the foreign currency problem is not a problem for the banks to resolve as banks are merely intermediaries and implementers of policy frameworks set outside their purview. When one analyses the foreign currency issue correctly and objectively, one quickly notes that banks do not by themselves generate any foreign currency, save for lines of credit that they can facilitate for exporters.

It follows therefore that when a company that does not in itself generate any foreign currency approaches a bank, which also doesn’t generate foreign currency, where does that company expect the foreign currency to come from?

What we need in the economy are policies that encourage forex exchange to be channelled through the formal banking system. The current policy environment, which seems to penalise exporters who channel earnings via formal channels makes it not conducive for earners of foreign exchange to channel it through the formal system because of price misalignments.

We therefore end up with a lot of foreign exchange being traded outside the formal system. Right now, when a company goes onto the parallel market they can easily meat all their foreign currency needs because the prices on that market are correct.

The shortage of foreign exchange in the formal banking system is due primarily because of the fact that the price on the formal market does not reflect the true economic value of foreign exchange. The bottom line is that as long as there is a price disparity between the formal and informal market, there will be shortages in one market and adequate supplies in the other.

Controls have also harmed the foreign exchange market in a big way. Whilst basic economic tenets dictate that the bond note and the US dollar cannot reasonably trade at the same exchange rate, because of the polar differences in the two currencies, we have enforced controls at a one to one exchange rate. The consequences are everywhere for us to see.

There are now multiple exchange rates in the economy. There exists a rate between large denomination US dollar cash notes and smaller denominations. There is a price to be paid for soiled notes versus clean notes, older series notes versus later series notes, bond notes against US dollars, bond coins against bond notes, US dollars against RTGS money, and US dollars against mobile wallet money.

All this confusion in the market is due to the fact that we have tried to control that which we should not control. Foreign currency has run out of the formal market and is being peddled in the informal sector, with serious consequences on the broader economy.

I posited in a previous article that the current state of the foreign exchange market is harmful because it rewards importers and speculators whilst severely punishing exporters and genuine producers and other generators of foreign exchange.

Lastly, the discord in the various exchange rates in the economy has led to price distortions in the consumer goods market. These distortions are the ones that are now prompting the authorities to try and intervene in the pricing and availability of goods. Unfortunately, we seem to be walking the same bumpy road that we walked 10 years ago. The results will soon be telling.

Government is best advised to stay away from controlling prices, but regulating in order to facilitate free trade. Market mechanisms should by and large work for the better of the economy. Adam Smith’s wisdom, in this respect is both priceless and timeless.

The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the writer is associated with.

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