Exchange rate volatility only blemish left
The Zimbabwe economy is doing well and expanding with the only blemish being the resurgence of domestic inflation as a result of the volatile exchange rate, Reserve Bank governor Dr John Mangudya has said.
Speaking at the Zimbabwe Economic Society Monthly webinar meeting held on Wednesday, Dr Mangudya highlighted the country’s success factors including the growth in economic activity as well as the growth in export earnings.
Dr Mangudya noted the economy had experienced improved foreign currency generation as evidenced by US$9.7 billion worth of forex receipts against payments of US$7 billion. The growth in export earnings among other growth areas such as manufacturing sector, mining and agriculture was evidence that the economy is doing well according to Dr Mangudya.
He, however, pointed out that the volatile exchange rate and its pass through effects on inflation remains the number one enemy.
Despite slightly weakening from an exchange rate of $108 per US$1 in December 2021 to $118 per US$1 at the last auction in February 2022 on the official foreign currency auction system, the local currency trades at a huge premium of approximately 90 percent on the parallel market.
On its part, despite falling from a high of 837 percent in July 2020 to a low of 50,2 percent in August 2021, inflationary pressures have also re-emerged to close the year 2021 at 60,7 percent.
Though inflation slowed to 60,60 percent in January, Dr Mangudya said this was not ideal and vowed to reduce it to between 30 and 35 percent by year end.
“The economy is doing well and the major issue we are left with in this country is the volatility of the exchange rate and its pass through effects onto domestic inflation.”
Describing the central bank’s monetary policy framework as conservative, Dr Mangudya said most indicators are positive including fiscal consolidation and sustainability.
“The only thing not taken positive is the resurgence of inflation in the last quarter of 2021,” he said.
As a result, Dr Mangudya said the apex bank will focus on anchoring inflation and exchange rate expectations.
Responding to calls that the country must redollarise if it is to attain exchange rate and price stability, Dr Mangudya said the country does not have enough foreign currency liquidity to sustain a dollarised economy.
Dollarisation is not a walk in the garden park, he said explaining that for it to be sustainable it requires liquidity.
According tohim, Zimbabwe, without any meaningful reserves simply does not have liquidity as the foreign currency in the economy belongs to specific individuals and institutions and should not be seen as liquidity for use by the general public.
“The liquidity which is in the banking sector belongs to customers and not for the general use by the general public. It’s for specific individuals and specific companies. “We cannot take that money and throw it away to the general members of the public.
That money it is for the customers and therefore belongs to customers.
“So when we talk about the US$1,7 billion, it belongs to customers of banks, but banks can use it for intermediation,” he explained.
The solution, Dr Mangudya said is to encourage the use of the local currency and to also build foreign currency reserves.
“We need to address risks such as exchange rate volatility and the rising parallel market premium and global inflation,” he said.
Analyst Victor Bhoroma, speaking at the same meeting, said the solution to exchange rate volatility is in implementing a proper Dutch auction system and to also increase the export retention levels for the manufacturing sector.
He said a significant amount of foreign currency was in the informal sector because of the inefficiencies of the official forex trading systems.
The current exchange rate distortions and the prevailing arbitrage opportunities are discouraging manufacturers as they cannot compete with importing traders, he said.
Economic analyst Tinashe Murapata said the central bank would be better served to make Statutory Instrument 85 of 2020 permanent. Statutory Instrument 85 of 2020 allows payment forgoods and services using free funds.
Murapata argued that the RBZ will not be able to control use of the US dollar in the economy.
Dr Mangudya agreed and said Statutory Instrument 85 of 2020 is here to stay although the central bank will still focus on encouraging use of the local currency rather than foreign currency.
He said the solution would be on increasing productivity and produce as much as possible in the formal sector. Reduction of money supply will also remain a focus area.-eBusiness Weekly
