eBusiness Weekly
Economy Uncensored with Tapiwanashe Mangwiro
In recent years, Zimbabwe has grappled with economic challenges stemming from foreign exchange market distortions and restrictive policies.
However, amidst these struggles lies a promising solution advocated by prominent economists worldwide: FX market liberalisation.
This approach, endorsed by the International Monetary Fund (IMF), offers a pathway to economic rejuvenation by promoting transparency, efficiency and stability in currency markets.
Last week, an IMF staff team visited Zimbabwe on January 31-February 14, 2024, to discuss the authorities’ request for a Staff Monitored Programme (SMP).
In their report, the team said; “The mission encourages the authorities to accelerate the foreign currency market reform by promoting a more transparent and market-driven price discovery in the official exchange rate and by removing existing exchange restrictions and distortions.
In particular, the restriction on the 10 percent allowable trading margin for pricing domestic transactions should be eliminated.
“The foreign currency market reform should be accompanied by establishing an effective framework for exchange rate and monetary policies.
‘‘Establishing such a framework requires careful preparations, including, among other steps, comprehensively addressing underlying sources of fiscal pressures. The RBZ Act should be amended, including to narrow its legal mandate to core functions.”
In short, the IMF advocated for liberalising the foreign exchange market and establishing an effective framework for exchange rate and monetary policies.
Economists such as Milton Friedman have long championed the benefits of market-driven exchange rates.
According to Friedman; “A freely floating exchange rate is a key element of a market-oriented economy.
It allows for efficient allocation of resources and facilitates international trade.”
Indeed, by allowing supply and demand to determine exchange rates, Zimbabwe can harness market forces to achieve optimal resource allocation and foster a conducive environment for trade and investment.
One of the primary advantages of FX market liberalisation is the enhancement of market efficiency.
As Nobel laureate Friedrich Hayek observed; “Prices convey information about scarcity and value, guiding individuals’ economic decisions.”
Through liberalising the FX market, Zimbabwe can harness the power of price signals to allocate resources efficiently, reducing wasteful practices and promoting economic growth.
Moreover, FX market liberalisation can attract much-needed foreign investment. Renowned economist Joseph Stiglitz notes; “Investors seek environments characterised by transparency, stability, and openness.”
Zimbabwe can signal its commitment to economic reform, thereby instilling confidence in investors and attracting capital inflows crucial for sustainable development.
Price stability is another critical benefit of FX market liberalisation and as Paul Krugman, Nobel laureate in economics, emphasises; “Exchange rate stability is essential for maintaining price stability, which is a prerequisite for economic growth.”
Hence by allowing exchange rates to adjust freely based on market fundamentals, Zimbabwe can mitigate inflationary pressures and create a conducive environment for businesses to thrive.
Furthermore, FX market liberalisation can stimulate export growth, as highlighted by economist Dani Rodrik. Rodrik argues; “A competitive exchange rate is vital for enhancing export competitiveness and narrowing trade deficits.”
So, by allowing exporters to price their goods competitively in global markets, Zimbabwe can boost export earnings, improve its balance of payments, and foster economic resilience.
The practical implementation of FX market liberalisation in Zimbabwe requires concerted efforts and comprehensive reforms.
The IMF, in its recent report, emphasised the need for transparent mechanisms for FX price discovery and the removal of existing exchange restrictions and distortions. These measures are crucial for creating a level playing field and encouraging broader participation in the FX market.
Additionally, establishing an effective policy framework for exchange rate and monetary policies is imperative. This involves addressing underlying fiscal pressures and amending relevant legislation, such as the Reserve Bank of Zimbabwe (RBZ) Act.
By narrowing the legal mandate of the RBZ to core functions, Zimbabwe can strengthen its institutional framework and promote sound monetary management.
In conclusion, FX market liberalization holds the key to unlocking Zimbabwe’s economic potential.
By embracing transparent, market-driven policies advocated by prominent economists, Zimbabwe can overcome its economic challenges and embark on a path of sustainable growth and development.
It is time for policymakers to heed the call for reform and seize the opportunities that FX market liberalisation presents for a brighter future.
Tapiwanashe Mangwiro
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter, [email protected] on email and Tapiwanashe Willoe Mangwiro on LinkedIn
