eBusiness Weekly
Taking Stock Kudzanai Sharara
Amonth or so ago, when asked during an interview with a local online media house what the price of bread was, Finance and Economic Development Minister Mthuli Ncube, had this to say:
“It is what it is!”
This answer did not go down well with a lot of Zimbabweans especially on social media.
He is arrogant, some said.
To some, the answer implied that he is out of touch with reality and shows his lack of concern with the suffering majority. Prices of basic commodities have been escalating unabated and in the process eroding disposable incomes. Probably that’s the reason why most thought his answer was insensitive to their plight. That he is the author of austerity measures that they are having to endure makes it worse. It is what it is, is rather rude an answer.
However, looking at it differently, his answer was probably spot on. While there is always a recommended bread price, it is not what consumers pay at the till or at a market stall somewhere in the suburbs.
There are price distortions in the market, not only for bread, but for everything else.
At the time of the interview, the recommended price of bread was $6,90 but because of shortages, consumers could pay varying prices up to $9 depending with place and type of outlet. Prices also depended on mode of payment. More if using swipe or mobile money. But probably less if using physical cash.
So whatever price Minister Mthuli could have picked, some could correctly dispute as they could be paying more. So the price of bread “is what it is”.
What’s the right exchange rate?
Early this week, Minister Ncube was at it again, using a model that suggested that the exchange rate should be at ZWL$5,6.
“The exchange rate of the #Zimbabwe dollar to United States dollar is way undervalued. The exchange rate of Zim$ to US$ should be around 6 at the moment, on the basis of the real exchange rate (RER) relative to the South African rand,” tweeted Minister Ncube.
The model used quantifies the ZWL$/US$ exchange rate based on the real exchange rate with South Africa, deriving the nominal exchange rate that would keep real purchasing power of the currencies at 2011 levels, a year of relative macro-economic balance. The model thus suggest that the local dollar is seriously undervalued at current exchange rate by not less than 80 percent.
Source: Ministry of Finance and Economic Development
That the local currency is now seriously undervalued is a notion that was also shared by Economist John Robertson.
“The Money Supply growth rate was building up pressure that was contained by the official 1:1 exchange rate, but this had to give way eventually because the country never earned the many billions to make up total Money Supply,” said Robertson.
He argues that the bulk of the growth in Money Supply was in local dollars even if authorities wanted us to believe the local dollars that were being injected were equal to the US dollar at the 1:1 parity.
“Perhaps one billion of that was US dollars but when the Money Supply reached ten billion, that could be argued to reflect a 10:1 exchange rate,” said Robertson. In other words, all he did was divide Money Supply with the US dollars circulating in the economy.
In its Mid-Term Monetary Policy Statement, the RBZ said money supply was $15 billion. Assuming we still have just US$1 billion in circulation, then the exchange rate should be 15:1.
Source: John Robertson
The exchange rate: Is what it is!
However, all the above are just models. Authorities in the case of Minister Ncube and economists in the case of Robertson are expected to forecast key economic figures such as the exchange rate, inflation, GDP among others.
But the exchange rate should be where the market tells us it is. Discounting any market manipulation of course. If Minister Ncube believes the exchange rate should be below 6:1, then it’s his job to make sure it goes where it should be. His focus should not be in telling us where it should be, but in putting in place measures that will take the exchange rate to its correct level according to his calculations.
Last week, through the Financial Intelligence Unit, action was taken against some local companies with their accounts frozen pending analysis of their activities. To the market this implied their activities were akin to currency manipulation. The market responded with the parallel market tanking, but as we write, the rate is closer to where it was last Friday.
Further analysis is needed.
Why is the rate far detached from what is forecast by models? What needs to be done? Are we not generating enough foreign currency? Why? Is the market efficiently allocating forex? What’s causing the imbalance?
We expect authorities to look for answers to these questions and to be bold enough to take corrective measures if they find the causes without fear or favour. Last week was a good start!
