Foreign currency auction system laudable

19 Jun, 2020 - 00:06 0 Views
Foreign currency auction system laudable

eBusiness Weekly

Elias Pacheso
This week saw the introduction of  the much-talked about Foreign Currency Auction System (FCAS).

Its introduction follows weeks of running battles between the Financial Intelligence Unit of the RBZ to reduce pressure on the exchange rate, which has been driving up inflation in the economy.

In May 2020 the annual inflation rate shot up to 785 percent in May up from 765 percent in April 2020.

Monetary authorities have every reason to be alarmed by the rising rate of inflation but it may be a little bit late now to contain it.

Inflationary expectations are running riot and for citizens, this has affected the value of their local currency earnings and reduced buying power. This has  caused untold suffering to many especially the common man on the streets.

Coupled with the debilitating effects of the Covid-19 pandemic which cut down economic activity, the situation is turning out to be dire.

Announcing the new foreign currency trading system monetary authorities are concerned with one thing alone — steadiness of the exchange rate and thereafter its effect on price stability and the general cost of living.

Bearing in mind that the exchange rate has been moving based on more than supply and demand dynamics, it will be interesting to see if the market views this latest move as an effective way of allocating scarce foreign currency in the country.

Remembering what I have always said, foreign currency in Zimbabwe is seen as a store of value but more importantly as an investment, or an asset class to be more specific.

Consumers and business chase after it as a way of protecting themselves from rampant inflation and as long as there are limits to how much can be traded and of course as long as demand is more than supply, a premium will always be paid for the dollar.

Turning to the FCAS announced by authorities this week, it is a step in the right direction but its success will depend on how little authorities are seen to be interfering with its functions.

Where the system operates without controls it is a transparent way of allocating available foreign currency to the highest bidder, something that the informal black market was attempting to do with undesired results, at least according to authorities.

As often happens in economies that don’t have enough foreign currency reserves, the system has limited applications and again its success will depend on something that authorities have not been good at controlling, “perceptions”.

Even with the best intentions and rules, the currency situation in the country is crying out for costly radical economic measures, something that appears to be a bitter pill to swallow for authorities at this time.

At the same time that the Government announced the measures, a new pay structure and scale that is seen adding to the cost of running the country’s oversized civil service was also announced.

The new pay structure will see civil servants being given an allowance of US$75 every month to cushion them from rising inflation which has eroded their buying power. Whilst welcome, the measures does raise questions about the cost and sustainability of such measures and points to even bigger long term challenges arising from its financing which has often been seen as inflationary.

When all is said and done, the success of all the measures announced by the Government depends on people’s goodwill and authorities’ political will to stick to their word on policies and bring about much needed stability.

The latest changes to policy are not new and remind many of the year 2009 when the Government abandoned the Zimbabwe dollar in favour of the multi-currency system.

The success of the FCAS depends on a number things, the most important being the supply of foreign currency in the formal channels, that is export earnings, diaspora remittances, access to foreign loans, grants and of course attracting deposits into the interbank system.

On the export front, the country is not doing too well owing to the Covid-19 crisis. Exports dropped to a three-year-low as economies are only starting to reopen following months of inactivity.

This has had the effect of cutting export revenues, while demand for foreign currency to purchase food, medical supplies has been increasing.

Foreign lines and remittances are equally affected and further limiting foreign currency inflows into the country. The country has very few choices.

My overall verdict is that an auction system is exactly what is required at this time but it must be supported by other measures that strengthen its foundation and reinforces its appeal in allocating scarce resources. A reduction in Government spending, though unpalatable is exactly what the country needs to send the right message that we are living within our means and ready to lay a firm foundation for restoration of confidence in our economy.

It is not yet clear how everything will turn out, but we are faced with some tough choices and  times ahead and my view is that everyone should try and play their part in ensuring that the country limits its reliance on imports.

This means we must focus on growing enough food in order to avoid unnecessary imports. Working from home means we can cut down on fuel bills and reduce spending on imports.

Buying local is also key in cutting exports and keeping our factories open.

The Government has lots of tools at its disposal to incentivise the public and get the desired behaviour that drives the outcomes it needs to see on the ground in terms of foreign currency demand and inflows.

Regaining trust is key when it comes to policy consistency. It’s been said that Zimbabwe has so much foreign currency in the informal sector but to attract such deposits into the formal banking sector requires rebuilding confidence in the system.

Without policy consistency and steady price levels, reforms will be difficult. My hope is that a holistic approach that sees everything as interconnected will be taken to solve the crisis of confidence in our currency.

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