Dictating exchange rates hinders economic growth
The official exchange rate currently stands at 13,7 Zimbabwean dollars to US1 dollar, while the black-market rate hovers around 22.
Economist professor, Gift Mugano, asserts that the Reserve Bank of Zimbabwe (RBZ) must transition from a “controlled exchange rate” to a market-driven one to achieve a truly competitive currency.
He argues that the current system, where the Government dictates the exchange rate, is hindering economic growth and stability.
“The first priority is to establish a market-driven exchange rate, not a Government – controlled one,” says Mugano.
He explains that a controlled exchange rate defies basic economic principles: when supply falls short of demand, prices rise.
He said in Zimbabwe, the official exchange rate remains artificially low despite a severe shortage of foreign currency.
“This is akin to expecting tomato prices to stay the same in Mbare Market when there is a shortage,” says Mugano.
“Controlling the exchange rate creates shortages. “Even exporters who earn foreign currency are hesitant to sell it at the official rate. They face a double loss: not only do they receive a portion of their earnings in the local currency at a devalued rate, but they also miss out on the higher parallel market rate.
The official exchange rate currently stands at 13,7 Zimbabwean dollars to US1 dollar, while the black-market rate hovers around 22.
This significant disparity between the official and parallel rates creates a challenging environment for price discovery and economic stability.
“Let us allow the rate to move to optimum level or equilibrium level”.
In addition, Mugano says the central bank should permit the printing of money in amounts that align with the nation’s demand to ensure a smoothly functioning economy.
He says the central banks should focus on creating a stable and reliable currency, rather than simply introducing new banknotes without a corresponding economic need.
The current practice of announcing large quantities of new currency without putting it into circulation is “counterproductive.”-ebsinessweekl
