eBusiness Weekly
Oliver Kazunga
Convergence of formal and black market exchange rates will never be achieved unless structural inadequacies in the financial services sector and industrial productivity to enhance exports to earn more foreign currency are addressed, according to economists.
In the second half of last year, Government implemented a cocktail of measures aimed at stabilising the economy by taming the runaway inflation, ultimately resulting in almost convergence of the official and black market exchange rates.
Such policy measures included hiking of bank policy rate to 200 percent from 80 percent to discourage speculative borrowing for purposes of dabbling in illegal currency trading and exploiting arbitrage opportunities on the equities market.
Although the official and parallel market exchange rates seemed to be nearing convergence in the second half of 2022, in December the premiums between the two markets started widening again.
For instance, at one point in September last year, the interbank rate stood at $621,6 against the greenback and the black market rate traded between $700 and $750.
This week, for instance, the interbank rate stands at $694,2 against the United States dollar while the parallel market rate traded at between $1 000 and $1 200.
Economist, Professor Gift Mugano, said the convergence of the exchange rate was difficult to achieve on account of a number of reasons authorities should address.
“Convergence of the exchange rate is very difficult to achieve for a number of reasons. First, we have our auction system which is not market-based, there is no question about that. You have seen even the IMF recommendation; they were talking about further deepening the liberalisation of the exchange rate.
“It’s on the basis of their discussion with the authorities that the rates it’s a free-flow floating. When they don’t float it becomes very difficult for the official exchange rate to converge with black market,” he said.
“When it comes to the issue of scarce foreign currency, there is a structural challenge. When we talk of a structural challenge, we are talking of supply side constraints in the sense that only a few banks — two or three the whole market control foreign currency.
“How then do you have the willing buyer-willing seller platform that is effective when the money (70 percent of forex) is being controlled by one bank?
“It tells you again that the participation of willing buyer-willing seller, even if Government doesn’t want to control it, it has already lost because there is one bank or two which have got dominance in terms of ownership of foreign currency.”
As such, Prof Mugano said the other banks now do not have enough muscle to participate on the market and thus resulting in a monopolistic system where the price is set by one player. “If you are a monopoly, you determine the price and it therefore means the free-market system that we see at Mbare Musika when we go to buy tomatoes where we then have an efficient price discovery, will not happen also in the foreign exchange market in Zimbabwe because of the structural challenges which l have alluded to,” he said.
Turning to the control of liquidity (Zimbabwe dollar), Prof Mugano said that there were also structural challenges with few corporates controlling bank deposits.
“Again it also tells you that when they (few businesses controlling bank deposits) go to participate in the foreign exchange market, they also have the bargaining power.
“But if the money was shared almost equally against many companies and individuals, it becomes a free market. A free market has to have many suppliers and many buyers.
“So, in that way you are going to have a perfectly competitive price which will have a price regime of the foreign currency, which is the exchange that is equal to the black market because there will be free competition. Our challenges are very deep-rooted than what people see from the surface,” said Prof Mugano.
“It’s much more to say Central Bank headed by Dr (John) Mangudya is controlling the exchange rate. If Dr Mangudya today says I am closing the auction system and goes for the willing buyer-willing seller, I can guarantee you it won’t even work to give an efficient exchange rate which is going to be market-determined, which is going to be converging with the black market.”
In this context, he said the exchange rate which is within the banking sector will remain lower than the parallel market rate because in that market (black market) there is no monopoly.
“We ned to disrupt the economy by having more players in the banking sector who are going to be generating foreign currency, we need to export so that we don’t have one dominant bank. We need to have an economy that functions by working on production so that every bank participate and be able to have clients and have money, and we are able to have free competition.
“We need to have a stable macro-economic environment which is encouraging production.
“We have challenges of production and we continue to be importing and thus we need disruption and this has to be very technical and strategic to say that what is it that we need to be doing.
“We need to do things in a different way. For example, in the mining sector its disruptive where we see a lot of investments in the mining sector, into steel, lithium, and platinum. We need Ministry of Industry and Commerce to take leadership and push for disruptive strategies,” said Prof Mugano.
Another economist, Victor Bhoroma said it is now clear that the convergence of the exchange rate is a “mission impossible”.
“It’s now plain and clear that it is mission impossible already because the premium is now over 70 percent so from the facts that are on the ground, it won’t be achieved and largely because money supply growth has not yet been tamed.
“At the same time, we do not have a free market determined exchange rate. When you have those two fundamentals then you add that we don’t have market confidence in monetary policy, it means that the two rates will never converge,” he said.
Bhoroma said the most important fundamental that needs to be there is the existence of a free market determined foreign exchange market as well as having the Central Bank reverting to its core mandate of managing inflation to maintain the value of local currency.
Its secondary mandate, he said is to ensure a stable banking system as well as ensuring the Reserve Bank act as an agent for the Government implying that the monetary authority should cease all quasi-operations it is undertaking.
“Obviously, there is a need for growth in money supply which is in line with the macro-economic growth,” said Bhoroma.
Another economist, Wendy Mpofu said there is no country whose economy can grow when there are opportunities to trade in foreign currency.
“So, what it does, it drives up the exchange rate consistently and as long as the exchange rate are moving with high disparities, we will continue to have runaway exchange rate.
“Once that happens we have runaway inflation and it means our fight on inflation we will not win it. The moment the exchange rate continues drifting apart, people deal with negative confidence around the financial market and people continue to speculate,” she said.
