We have in the last week of June experienced a number of measures consolidating authorities’ objective of achieving local currency stability and promoting productivity. It would be amiss to celebrate the implementation of same without further exploring and perhaps expressing what would still be required to further entrench the success of these measures. Notably the measures undertaken include:
- The adoption of the foreign currency auction trading system in replacement of the pegged exchange rate system that had resulted in a huge premium between the official exchange rate of $25:US$1 and the parallel exchange rate that had reached a high of $100:US$1
- The upward review of the bank rate from 15 percent to 35 percent by the Monetary Policy Committee in their meeting of June 26. This is intended to remove the possibility of arbitragers who may find it profitable to borrow cheap local currency and speculatively purchase foreign currency which is now readily available on the auction system.
- The temporary suspension of mobile money agent lines to curb the rampant speculative and rent seeking behaviour for which the facility was being exploited and enable authorities to comprehensively review operating models that would ensure their effective oversight. This is intended to ensure efficacy of monetary policy and enhance transmission mechanisms of policy through directives issued.
As a result of the above, the market has already seen a total of US$26 million being traded through the auction system over the first two auctions against total bids of US$29 million. This shows a shortfall of US$3 million over the two week period being the difference between the bids and the allotted amounts. Authorities need to transparently explain this difference by showing the reasons why the allotments were not achieved in full as a way to begin to generate confidence on the system. It risks being regarded as an inability to meet demand.
On the other hand, mobile money floats traditionally used to trade foreign currency on the street corners have dried up resulting in very uncoordinated pricing wildly ranging from 60:US$1 up to 85:US$1 on the parallel market as opposed to the previous uniformity and homogeneity prevalent. Transactions are also now decidedly small amounts mostly for personal deals. It is a sign that market is gasping for air and made worse by the availability of foreign currency on the formal system through the auction. The authorities can reinforce this gain by simply increasing transparency on the formal market operations.
However, the two-week auction results can be inferred to just under US$60 million for a month. In order for the market to start gaining confidence on the system, credible information necessary for analysis of the anticipated projections going into the rest of the year is required. The monthly import bill for the country for 2019 ranged from around $163 million up to highs of US$600 with the average projected monthly import bill for 2020 being around US$500 to US$600 million according to global macro models and other analysts expectations.
On the other hand, average monthly exports for 2020 are projected at US$350 although this has reached US$450 for Quarter 1. Projections are expected to trend upwards to US$530 from 2021, according to our econometric models.
While the year-on-year inflation figure jumped to 786 percent at the end of May, the month on month figure slowed down to 16,55 percent, which is a 7 months low. The month on month decline though has not yet filtered in the adjusted prices of fuel which have gone up by about 47 percent following the introduction of the auction system. Further, retail prices have also gone up following the removal of the exchange rate peg which is somewhat puzzling given that retailers had always already priced their goods at an anticipated higher rate above 100:US$1 as they were not using the pegged exchange rate anyway.
The directive by the authorities for retailers to display both the rtgs and US$ prices of goods on their shelves as a way to curb speculative behaviour has not really taken root. An example is that a 2 litre Mazoe orange drink is labelled $299 on the shelves in the big retail shops with no equivalent US$ price shown on the side per new rules which should be shown as US$4,69 at the current exchange rate of 63,7442. However, when one approaches the till point and requests for the US$ price one is advised a figure of US$3! Translated back to rtgs it becomes $191,23. This is a somewhat puzzling behaviour for the consumers and does not reflect well on the retailers’ responsibility.
An element of resistance may not be ruled out as business still prefers taking cover while watching for the success of the new system. This is the reason it is of essence for the authorities to be as transparent as possible in the auction system so that clear projections can be deduced by business in their pricing models and avoid pricing on expectations and rather speculative reasons.
In addition, in order to buttress the new measures and increase confidence, it is necessary for the authorities to now consider adopting an inflation targeting model. This will assist in keeping money supply growth in check and create a good and complimentary mix together with the measures already adopted
On the business side, it is important to begin to embrace the changes that the authorities have put in place because by and large this is in line with the calls that many have made from the private sector, including opening up the forex trading market, removal of inefficient subsidies, dealing with the cash barons and arbitragers causing destabilisation on the market as well as review of the export retention thresholds. With an estimated US$1 billion sitting on nostro balances from exporters as well as free funds, the system does look sustainable and has great potential to succeed. There is one fundamental question still remaining though and that is with regards to rampant corruption which must now be decisively dealt with and destroyed.
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/in/misheckugaro Twitter: @twitcagan.com