Next step to bring economy out of currency pangs

With the Zimbabwe dollar firming and money supply seemingly under control, trading of foreign currency must now be passed on to banks for sustainable exchange rate and price stability in the economy, analysts and industry players have said.

The Zimbabwe dollar firmed for the third consecutive time this week on the Reserve Bank of Zimbabwe (RBZ)-run wholesale foreign currency auction system, where banks participate for onward sales to clients.

Though the local currency firmed to $5,396 per greenback this week, from a peak weakness of $6,926, there are still doubts over the sustainability of the current arrangement where Government, through the central bank, is the only seller.

Others are also of the view that the ongoing stability can easily turn into instability on unverified information that Treasury is not paying Government suppliers and for export surrenders.

Exporters surrender 25 percent of their foreign currency earnings to Government in exchange for Zimbabwe dollars.

Once Government resumes paying suppliers, the local currency will collapse again, is the popular sentiment among doubting Thomas.

Secretary for Finance and Economic Development ,George Guvamatanga, told Business Weekly that such allegations are not correct.

He said; “All retentions (surrenders) have been paid on receipt,” while suppliers are being paid unless they are “invoicing at (an exchange rate of) $8 000:US$1 or above until they align to the prevailing exchange rates.”

Amid the mistrust and lack of confidence, analysts and industry players have called for further refinement and consolidation of the latest measures.

Bankers Association of Zimbabwe President, Lawrence Nyazema, suggested that it might be time for all customer forex sales and purchases to be done by banks.

He said Government can initially support banks through wholesale structures like the willing-buyer, willing-seller auction.

“But in the medium-term, the markets should square off on its own with RBZ only taking excess funds or providing additional liquidity as and when required,” said Nyazema by text message from Germany.

To buttress such a measure, Nyazema said government and economic players need to work on reducing inflation, which is the main reason no one wants the local currency.

The second point is to create sustainable demand for the Zimbabwe dollar “so that those earning forex like mines voluntarily convert forex in order to pay ZWL commitment”.

The recent tax measures should be enhanced, he added.

Investments advisor and business consultant specialising in the Zimbabwe SME sector, Farai Mutambanengwe, said stability implies getting rid of volatility, uncertainty and unpredictability, which are prevailing.

He said people need to be able to plan and function within an environment that is predictable, “and right now the only environment offering such predictability is the USD dollarised, informal environment and not the formal environment”.

“The issue of the currency needs to be brought to finality by pressing on towards having a single exchange rate for the entire market (i.e.) convergence of formal and market rates in a formal foreign currency market) and ensuring the monetary base remains stable (i.e. no printing).

“For that to happen, the authorities need to expand the realm of the formal forex markets to incorporate domestic transactions, given that we are a multi-currency economy,” said Mutambanengwe.

Further, Mutambanengwe said it is imperative to have normal payment cycles within the local currency environment, particularly from government as the biggest player in the economy.

“Instances of excess liquidity one moment and then excessive mopping the next do not foster predictability and therefore discourage economic agents from using the Zimbabwe dollar as a means of trade.

“Extreme swings either way in the value of the currency are detrimental to business and to stability,” he said.

Agribusiness development practitioner with special interest in financial inclusion, Dr Reneth Mano, said stability should be measured in terms of stationarity of prices and exchange rate “and not defined in terms of sustained absence of the Zimdollar from banks, ATM and people’s wallets which by all accounts tends to structurally suppress inclusive growth of domestic economy”.

He suggested full liberalisation and privatisation of foreign exchange market with the RBZ playing only a regulatory supervision role.

Dr Mano said with the fine-tuning of the auction system now completed it’s now time to launch a completely liberalised foreign exchange trading platform.

“This is the move needed to integrate the official auction system where only Government is the willing seller with all the parallel foreign currency marketing structures where private owners of forex are selling their US dollars on a willing buyer and willing seller terms of exchange.

“This bold policy move would also liberate the RBZ to focus 100 percent on fundamental monetary policy functions of managing money supply and exchange rates and supervising the deepening of Zimbabwe banking and financial system for optimal mobilisation of savings and provision of wide range of options for financing the inclusive growth and development of our economy,” said Dr Mano.

Going forward, according to Dr Mano, it is important for Government to clarify the short-term and medium-term strategic policy position with respect to dollarisation of the economy and the multicurrency regime.

He said there is need for the Ministry of Finance and Economic Development to specify the national short-term equilibrium goal in terms of whether it is to reach and sustain 100 percent dollarisation of the economy or is it to subtend 60 percent or 40 percent dollarisation of the economy.

“This is important for ensuring that expectations are aligned and the goals and targets that fiscal and monetary policy authorities are chasing are clear to all stakeholders and especially to the business community,” said Dr Mano.

He said given that the socioeconomic cost of full dollarisation are prohibitively high Government should take some very bold immediate policy measures to reassert the supremacy of Zimbabwe dollar as the official currency of doing business with Government.

This, he said, should be supported by “appropriate policies to protect and preserve the local fiat as the most convenient least cost medium of exchange for doing business within the borders of Zimbabwe”.

Dr Mano said although the multicurrency policy regime may continue to give every Zimbabwean the option to pay for goods and services using different foreign currencies, it should not be abused “to the extent that banks are now making it relatively easier for people to obtain foreign currency from ATM machines than to obtain the Zimbabwe dollar, and businesses are now making it cheaper and more convenient for customers to pay for groceries in supermarkets and vegetables in the informal market using US dollars than using Zimdollars”.

Economist Joseph Mverecha said if the latest measures are to bring sustained exchange rate and price stability, the RBZ should come up with some structure to widen access to Zimbabwe dollars by small banks amid reports that 85 percent of deposits are with five banks.

Further, Mverecha said, the RBZ should lower interest rates to 50 – 60 percent to occasion Zimbabwe dollar lending and borrowing.

“The RBZ should widen access to foreign currency by all not just importers thru the interbank market.-ebusinessweekly