eBusiness Weekly
Clive Mphambela
“The scarcity premiums or discounts are thus a symptom of excess demand for foreign exchange . . . It is the disequilibrium or mismatch between the domestic quantity of money (local dollars) and the supply of foreign exchange (foreign dollars) that cause cash shortages and, resultantly the scarcity premiums and the multi-pricing system,” reads the 2017 RBZ Mid-Term Monetary Policy Statement.
Zimbabwe’s economic recovery now hinges on a number of critical factors, one of which is the institution of very bold and pragmatic currency measures.
Whilst our problems go beyond monetary issues, currency reforms remain one of the key success factors for economic recovery over the next five years.
There is urgent need for the new Minister of Finance to institute comprehensive reforms of the monetary sectors, with a particular emphasis on addressing distortions in the money and capital markets, the foreign currency market, as we as addressing cash shortages.
Cash shortages in the pockets of ordinary consumers, and scarce foreign exchange for productive importers desperate for foreign exchange to pay for essential inputs are hobbling economic growth.
One no longer needs to go back to the history of instability and hyperinflation spanning 1998 to 2008 which resulted in the decimation of financial assets and the eventual demise of the Zimbabwe dollar.
It is true that Zimbabweans remain generally hung up and haunted by the widespread loss of value of deposits and pensions suffered during that epoch and this has manifested as the current dearth of confidence in the financial system.
Consequences of forex shortages
The direct consequence of foreign exchange shortages on the formal market is that we now have a dangerous multi-tier pricing system in the economy.
It is now common place that if one tries to buy a property in the suburbs, a motor vehicle, domestic capital goods or even groceries downtown, you can be asked to pay a lower price in US dollars (cash), a slightly higher price when paying in Bond notes and an even higher price when transacting on electronic platforms.
From this entry point, the currency equation requires Government’s immediate attention.
These distortions come at great cost and we are losing as an economy by allowing the “incorrect pricing” of vital resources such as foreign currency.
Speedy resolution of the currency problem becomes decidedly one of the critical ingredients for broader macroeconomic reforms that are urgently required for the economy.
The status quo is that the multi-currency system is not only functioning sub-optimally, but is also driving the economy in quite the opposite direction.
Primarily, the current state of the current multi-currency system is responsible for the dislocations in the foreign exchange market which manifest on two fronts as spiralling of parallel market rates on one hand and worsening foreign currency (nostro and cash) shortages in the formal market on the other.
The source of the dislocations above is none other than the foreign exchange system itself that is badly structured.
The pseudo peg of the RTGS and Bond note against the real US dollars 1:1 is simply not working and must be addressed if we are serious about economic recovery.
The currency framework is no longer amenable to piecemeal solutions and patchwork, but Government, through the central bank, must be bold enough and seize the opportunity to implement comprehensive reforms that are necessary for the normal functioning of the banking and financial system, and therefore, the sustainability of the economy going forward. Growing exports alone will not solve the structural problems hurting the foreign exchange system.
RBZ Governor Dr John Mangudya’s thrust for supply-side interventions will not yield fruits as long as fundamental market-based mechanisms for price discovery are lacking in the system.
As things stand, efforts aimed at stimulating the supply side, through subsidised foreign exchange for importers at the expense of exporters are creating longer term disincentives for exporters whilst creating an artificial demand for foreign currency from net importers. The result is that we are dissipating value through a forex “sinkhole” which rewards users of foreign currency at the expense of generators of the same.
The second problem as alluded to, parallel market rates are attracting foreign exchange from the formal banking system into the informal banking system. The streets are lined end to end by forex dealers whose job is now effectively to push up rates to create margin opportunities.
The forex and cash crisis can only be resolved through a bold and far reaching currency reform initiative led by the Government through the RBZ.
Resolving the currency reforms
My take is that addressing the currency problem is not divorced from general macro stability issues. Therefore, the currency reform program must be at two levels; first, there must be a sustainable macro framework or fabric and secondly, there must come a basket of legal and policy reforms required for long term monetary stability. Critical factors include the following; fiscal consolidation — there must be government expenditure realignment and adjustment in order to address monetary disturbances that are emanating from fiscal imprudence.
The Bond note must be demonetised as it has a thriving parallel market. The coins can be retained or even increased to alleviate adjustment problems for those transactions of low value.
The country’s debt problem must begin to be addressed, following a clear program with a defined end game.
Zimbabwe can and should adopt a new currency regime that involves a comprehensive review of exchange controls especially export surrender requirements.
The banking sector should be allowed to or even directed to introduce a new set of “hard currency foreign currency” accounts where funds deposited into these new accounts by individuals, corporates and NGOs, among others, from a cut-off date, are kept in nostro or cash on a fully matched basis.
These special FCAs must be protected by law, and customers should be able to utilise these in an unfettered fashion. However, national priorities should be taken care of, not from export surrender requirements but from appropriate import taxes that on certain classes of goods should be payable in foreign currency.
This implies that the current RTGS money should be ring-fenced and be allowed to trade down over time, through the interplay of market forces between electronic US dollars in the banking system and real or nostro dollars.
This will require a raft of legal instruments and policy reforms needed to facilitate migration from the current illusion of dollarisation to a new currency regime that restores the integrity of the multi-currency system.
Demonetisation of the Bond notes and implementation of the above measures will not come without serious pain of adjustment. It is without doubt that the current foreign currency liquidity challenges can only be resolved in the short term through enhanced access to lines of credit, sustained growth in inward remittances; portfolio investment flows and grants and in the medium to long term, through the growth of exports, which themselves are a function of greater investment and productivity.
However, if we are to be serious, fiscal reforms which are necessary for macro stability, also require pragmatic currency reforms that will underpin and even drive sustained economic growth going forward.
The writer is an economist and the views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organizations that the writer may be associated with.
