RBZ urged to embrace market mechanisms on ZiG exchange rate
The launch of the ZiG currency could have benefited from a more refined strategy.
Enforcing the official ZiG rate through the FIU might have created unintended consequences.
Exploring alternative approaches could be beneficial. Governor Mushayavanhu’s public communication surrounding the ZiG could be further tailored to build trust, writes Economic Analyst Dr Reneth Mano.
Best for now is for Dr Mushayavanhu to stay out of the public media and focus 100 percent attention on real currency policy issues that RBZ leadership is neglecting by getting carried away with road shows that are best left to the communications department under one of the deputies.
Dr Mushayavanhu has to put all hands on deck to align the Willing Buyer Willing Seller (WBWS) interbank rate discovery mechanism with rules-based minimum and maximum forex rates within which RBZ wants to stabilize the domestic rates using standard money market instruments – without the threat of using FIU brute force!
Rules-based currency rate stabilisation policy means that RBZ commits to stay away from daily WBWS interbank operations for as long as the daily rate movement is within prescribed maximum and minimum daily limits.
That RBZ would intervene by buying the ZiG from the WBWS interbank market to prop up it’s value whenever the ZiG is depreciating beyond the floor rate and by more than X percent of it’s apparent intrinsic value derived from daily market price of the underlying gold reserves backing the currency and volume of ZiG in circulation.
The reverse action of RBZ selling more ZiG at lower than the prevailing rate will be policy action needed to keep ZiG from becoming too powerful and rendering our exports uncompetitive.
It looks like presently the RBZ team is confused about how the intrinsic value of the ZiG derived from gold price movement relates at all with domestic market clearing daily ZiG rate from WBWS interbank if it is untethered.
The fact that these two rates will be very different most of the time appears to be lost and unnecessarily causing RBZ to panic when there is absolutely no reason to panic.
RBZ has to trust the rules of the free market game and stop confusing market players by vacillating – both in it’s public utterances and deeds — between the desire to force upon everyone a hard pegged or fixed official ZiG rate and WBWS free market determined daily ZiG rate.
RBZ would find it to be far more practical to routinize rules based strategy of defending the ZiG rate by accepting it’s rate to float freely within prescribed realistic band of say +/- 20-30 percent of it’s intrinsic value (for starters ).
When the rate rises or sink deeper than prescribed margins, RBZ must be prepared to say nothing but do the civilised action of buying or selling more ZiG on the daily WBWS interbank market to achieve policy targets.
Market economics is rich with a full bunker policy arsenal for RBZ and fiscal authorities to wage and win the war on keeping ZiG stable and strongly preferred as the primary and cheapest medium of exchange and store of value for conducting business within the borders of Zimbabwe.
There is the science of game theory and the art of waging a bloodless, civilised and dignified war to prop up and support the ZiG to become a stable domestic currency which is voluntarily and strongly preferred as the most cost-efficient medium of exchange and store of value for citizens and businesses operating within the borders of Zimbabwe!
There is still more that the fiscal authorities can play around with tax rebates and surtax to give an unassailable advantage to using our ZiG over any other currency under the multi-currency system.
There is even more that RBZ can do — without the aid of FIU — but with the aid of shrewd monetary policy instruments — to achieve social optimum desired monetary policy outcomes with the ZiG.
Given the great stock of human capital at Ministry of Finance and RBZ, I have no doubt that they can get the currency policy right by doing less with the hammer and much more with their collective mastery of the policy instruments and the art and science of their strategic deployment to achieve intended outcomes at least cost and no arrest warrants.
-ebusiessweekly
