eBusiness Weekly
Elias Pacheso
It is difficult to ignore last week’s currency exchange rate movements that prompted the Reserve Bank of Zimbabwe (“RBZ”) to issue out a public warning and censure a company that it indicated had injected significant liquidity into the market. The laws of demand and supply are efficient and were clearly at work prior to the intervention of the RBZ. There are many schools of thought on whether these controls work or simply aid speculation in the economy.
The economy has for many years been troubled by exchange rate instability and a closer look reveals that this happened in years when inflation was high and had clearly run away.
If any lesson is to be learnt from these developments, it is that letting the market play its role helps create a self-regulating market.
Authorities should only deal with the determinants of the exchange, which are money supply growth and government expenditure. If these are in harmony, the exchange rate is usually stable.
Prices in Zimbabwe tend to follow exchange rate movements especially when the currency devalues, feeding into more inflation. If monetary authorities are to tame inflation, they must target it and avoid at all costs allowing the cost of money to lag behind the rate of inflation because as long as this is the case, the speculator will always pick up cheap money and purchase the stronger currency to hedge against future exchange rate losses.
That the RBZ quickly moved to stop further depreciation is good but is unsustainable and the more this happens, the more the market feels the current exchange rate is artificial.
Typically, the RBZ should inject liquidity to provide support to the rate, but this is obviously not possible hence the moral suasion card the bank is playing on market players.
The fact that the exchange had not moved for over three months is encouraging and points to the fact that there was no invisible hand injecting unwanted liquidity into the market.
It is important to note that prior to last week’s movement the exchange rate had been stable and was trading in a very narrow band.
Such stability has translated into less volatile price movements and this is what the country needs to shore up confidence.
Policy enforcement lacking
This, however, is not being reinforced by policy. While the country adjusted prices for fuel, maize and other basic commodities reducing or eliminating subsidies incomes in both the private and public sector have remained quite low, making it difficult for salaried workers to eke a living.
Those out of work have suffered more and unfortunately this tends to lead to further hardships and instability. It is therefore important for the government to continue focussing on the welfare of the most vulnerable groups but more importantly on policies and incentives that attract investment into the country. Last week I touched on the importance of Foreign Direct Investment.
Unfortunately, the pace of privatisation and the reform of public enterprises has been slow and this continues to put pressure on the fiscus.
If the economy is to experience meaningful recovery difficult decisions in the area of privatisation must be made to bring about significant investments that can send the right message to the world that the country is indeed open for business and ready to do what is necessary to bring about investments into the country.
The country needs to create more jobs but existing employees need better pay and this can only happen if the economy starts growing.
On the foreign currency front Zimbabwe’s economy has seen a significant build up in foreign currency demand over the years owing to a number of reasons which should be explored in order to understand and hopefully address this recurring problem in our economy.
Successive droughts have resulted in the country importing food into the country diverting the little foreign currency that is generated to recurrent consumption, at a time the country needs to rebuild its infrastructure.
Zimbabwe used to produce over 750MW of electricity at its Kariba dam. Owing to drought and declining water levels this has dropped to less than 350MW. Hwange thermal power station used to produce 920MW but is now producing less than 228MW. A total of 570MW is being produced by the two plants against demand of over 1200MW.
The country is therefore having to implement an aggressive load shedding schedule to limit imports. I will not go into the case for renewable energy investment at household and corporate level.
I touched on the need to accelerate the implementation of rebates and incentives to encourage investment in this area.
Aside from these two main drivers of foreign currency demand, the country also imports fuel, medicines, equipment and spare parts.
These drivers of imports are all important and critical to helping the economy recover. It goes without saying that the country is indeed faced with a lot of challenges which need to be resolved in a strategic manner in order to restore confidence in the economy.
While the country has seen a rise in export revenues over the years, these revenues are not enough to meet the import demands, and the country has continued to experience a trade deficit.
That the deficit is narrowing is good but also points to our limited capacity to invest in capital goods that are needed to lift productivity in our nation. Going forward the country must focus on encouraging investment in capital goods as opposed to consumptive spending. Without capital expansion the economy will continue to suffer.
Pacheso is an experienced economist with more than 18 years’ experience in the financial services sector. He enjoys mentoring start-ups in his spare time.
