The recently introduced foreign currency auction system offers an opportunity for the stabilisation of the Zimbabwe dollar but there is need to develop mutually agreed safeguards to protect the Reserve Bank of Zimbabwe from fiscal pressure that will result in unsustainable money supply growth, the Confederation of Zimbabwe Industries has said.
High money supply growth levels, of more than 300 percent between June 2019 and first week of June 2020, have been blamed for the local currency’s weakness as well as the obtaining hyperinflation which reached 786 percent in May this year.
Fears are that high levels of money supply will derail efforts to stabilise the exchange rate through the auction system.
CZI is, however, of the opinion that fiscal and monetary authorities have it within their power to kill inflation by exercising fiscal and monetary discipline so that the auction system will not follow the route of the 2004 auction.
In a Foreign Currency Auction Policy Response Paper released yesterday, CZI said there is need to maintain “ironclad fiscal and monetary discipline.”
CZI said while the auction system is a good initiative “interference with the market mechanism and monetary indiscipline lead to inefficiencies that will cause the total collapse of the auction system as well as failure to defend the local currency.”
“There is need for collective effort so that we do not repeat the mistakes of 2004.
The current reality is that the market believes inflation will keep on rising but the central bank can keep the rate stable by “strict maintenance of money supply control,” said the industry representative body.
CZI also feared that fiscal pressures might force the central bank to resort to money creation even in foreign currency.
“The payment of COVID19 allowance in USD must be backed by real Nostro balances in Treasury accounts in order to avoid the creation of fictitious USD balances like what happened when we adopted the 1:1 policy in 2016,” CZI pointed out.
“If we fail to devise effective mechanisms to protect the Reserve Bank from fiscal pressure to create an electronic US dollar to meet civil servants pay, we may end up with an even worse situation than we currently have with the three currency system, real US dollars, electronic local US dollars and local currency.
“We all know this will be a political and economic disaster, and we need to help each other to develop mutually agreed safeguards to prevent this from happening.”
The new foreign currency trading system comes at a time the absence of a formal foreign exchange market had worsened access to foreign currency for business, in addition to fuelling the foreign exchange parallel market.
High unemployment, low production and productivity levels, and the currency crisis had almost eliminated any recovery prospects of the economy, according to CZI.
The industry representative body said in addition to an inconsistent policy environment, the doing business environment has been worsened by covid19 which has led to a collapse of demand, supply chain disruptions in source and destination markets, unemployment, debt accumulation, working capital difficulties, and loss of livelihoods for many.
With this background, the Monetary Authorities introduced the Foreign Exchange Auction Trading System as a way of fostering transparency and efficiency in the allocation of foreign currency resources.
CZI said enhancing market confidence in the long-term prospects of Zimbabwe dollar stability will be key.
This can be done through policy signalling, publicity campaigns and involving a small independent team of observers at each auction to validate auction results.
“Bringing exporters into the auction and allowing them to place their money and set their reserve price will also increase supply of forex to the auction.”