Dr Keen Mhlanga
Following the Minister of Finance and Economic Development, Professor Mthuli Ncube’s Statement on Policy Measures to Stabilise the Economy on May 29, Zimbabweans expect things to improve but is it going to happen?
The more any quantitative social indicator is utilised to influence how economic agents make decisions, the more vulnerable it is to various economic forces and the more likely it is to dislodge and distort the processes or outcomes it is meant to track.
The Finance Minister is uttering statement after statement, sending a clear indication that no matter what the goal, the outcome would be parallel to the planned target, owing to a reluctance to apply simple economic dogmas to guard against what we are currently confronting.
The objective of achieving economic stability appears achievable, and the more press statements and measures that are issued, the closer we get to the source of our problems.
The issue with fiat currency is that citizens lack trust in it; for example, many countries use USD whereas Europeans use the euro.
“Be loyal to the Royal,” with the royals serving as economic agents, and devotion should not be imposed in pieces. Treasury should endeavour to pass this exercise and avoid draining the people’s savings by using bond notes as a mandatory proxy for USD.
This means that the market is now hedging against any form of risk using all of its knowledge and rational expectations.
This presents a significant difficulty to decision— makers since the market is now operating with care and prudence when transacting.
With a low rate of uptake in the banking system. Increased retention on domestic foreign currency sales to 100 percent is a huge benefit for businesses because it enables them to put a significant chunk of their hard-earned income beneath the mattress and utilise it as they see fit.
This implies that policies to encourage banking and a savings culture in Zimbabwe should be changed in order to restore the financial sector’s virtually lost credibility.
It will be a grace period for them to retrieve what has been taken from them. The Treasury’s adoption of all foreign loans; use of the national budget as a conduit for debt settlement will not only pose problems, but will exacerbate existing ones.
The silver lining may be that they will harness every possibility of inflationary measures to have a negative impact on the debt. Budget implementation, on the other hand, has always been the achilles heel of Zimbabwean stakeholders and inefficiency will be a rock, causing a cascading effect on other obligations.
Relaxing import restrictions on essential items will lower the price of those goods in the local market, cutting inflation. On the other hand, this amounts to affect local industries in Zimbabwe, which reduces our country’s Gross National Product. This also leads to a supply constraint because domestic sources are insufficient for the country.
Policies should also prioritise the revival of our domestic manufacturers, which will result in huge job creation. Zimbabwe serves as an export destination for these products because they are produced at lower costs and increasing duty will actually restrict local producers, which will have serious consequences for potential entrepreneurs.
Inflation is easily described, however, there is a generalisation that phrases or words with easy definitions can have simple solutions.
Fortunately, inflation has its root causes, and taming it should be easier now that the root has been identified. However, many economies opt to ignore these root reasons and apply incorrect and preconceived solutions that are diametrically opposed to the correct course to take.
There is a fierce discussion regarding dollarisation in Argentina, despite rampant inflation and peso depreciation.
The extreme notion of establishing the dollar Argentina’s legal currency continues to divide opinion, but it is gaining support.
Argentina is not the only country considering expanding the US dollar’s role: Ecuador has made the US dollar the sole legal tender. Following seven years of hyperinflation, a talk about dollarisation is gaining ground in Venezuela.
In a softer form of dollarisation, the dollar would compete with the peso as legal money, as it does in Peru and Uruguay.
Zimbabwe’s road has been difficult and you can’t trade in local currency on an international stock exchange, and even international clearing houses can’t clear our local currency, which simply means it’s not an internationally accepted currency but a bonding mechanism used to make it appear as a currency in comparison to the USD.
We are already seeing the results of the issues caused by the introduction of bond coins in 2016.
By collapsing the tent of the issue, we should simply accept that this is not a currency and that it should be discarded, while the fundamentals are redeemed in preparation for the issuance of a new currency backed by confidence, foreign currency reserves, and output.
A parallel market is an unauthorised market for shares, currencies, and items that operates concurrently with the legal market.
The parallel market is governed by market forces of demand and supply that outweigh statutes that have been formalised by the government. The market has complete control over wisdom.
The exchange rate in Zimbabwe is determined by market factors; for example, when the supply of domestic currency is abundant, the exchange rate for foreign money rises. The supports Gersham Law, which claims that in the economy, the law observes that legally overvalued currency will drive legally undervalued currency out of circulation.
In Lebanon they designed a Capital Control Act to replace the informal controls in place with more transparent and effective controls to stem the continuing outflow of capital and help stabilise the exchange rate.
This was meant to restore a modicum of confidence in the monetary systems and the rule of law, as well as the flow of capital and remittances.
Plans also existed to unify exchange rates and transition to a flexible exchange rate regime. The failed exchange rate regime exacerbated massive current account deficits, harmed export-oriented sectors, and pushed the central bank to maintain high interest rates, resulting in private sector crowding out.
Monetary policy stability also necessitates the restructuring of Lebanon’s central bank (BDL) and the cessation of financing government deficits and wasteful and costly quasi-fiscal operations such as subsidising real estate investment.
Another ruse was to bite the bullet and remove excessive government spending. Starting with power sector reform and raising the prices of subsidised commodities and services such as fuel and electricity.
This was intended to prevent the smuggling of petroleum and other supplies into sanctioned Syria, which is reported to be depleting Lebanon’s reserves.
The battle is always on currency, whose value is dictated by market confidence, and the market, being the people, arbitrarily determines the rate based on the value they place on the currency.
The factors of parallel market are essentially market responses to government subjection, that is, when the government says the rate is on USD 1: ZWL1 500 while the market is already at ZWL 4000, it is like to using a pegged 36°C to a hot body.
When the interbank rate is close to or higher than the black market rate, we see ultimate stability and near-zero trade for money changers. This means that there will be no advantage to trade and that people will continue to use the present official channels.
Confidence is quite crucial. When everyone has a bad perception of the currency, its overall performance and purchasing power suffers; when everyone has this perception, the money ceases to function.
Printing increases the total amount disseminated, resulting in everyone having more money than before.
When the supply of a currency rises, the value of that currency falls. In Zimbabwe, for example, the Zimbabwean Dollar has reduced purchasing power since there is too much circulation and everyone has the notes.
Our economy is also dominated by the private sector, therefore players who receive government contracts tend to play the market by hedging. Inflation is also a major factor in the parallel market for currency exchange rates.
Price increases also cause fluctuations in exchange rates, especially when citizens want to buy something in foreign currency; they simply go to the black market, which is now the monarch, and exchange using their own rates, having no concern about the official rate.
Corruption and dual currency play a significant role in determining the parallel market exchange rate.
The parallel market exchange rate is also determined by the country’s over-reliance on foreign products, because when someone wishes to import, he or she will be forced to swap domestic money for foreign currency at any given rate.
When goods are imported, the seller will charge any exchange rate to discourage the use of Zimbabwean Dollars, forcing buyers to go to the black market to exchange for foreign currency. For example, in Zimbabwe, wholesalers, known as runners, only charge US dollars or a discouraging rate in Zimbabwean dollars because they import using foreign currency.
As a result, the Zimbabwean currency rate swings on a regular basis.
Dr Keen Mhlanga is an Investment Advisor with high skills in Finance. He is the Executive Chairman of FinKing Financial Advisory. Send your feedback to [email protected] <mailto:[email protected]>, contact him on 0777597526.