Currency market distortions cannot be wished away


Clive Mphambela
The problem in our currency markets have refused to go away. Despite significant inroads made by the authorities to ameliorate the situation, cash remains short in the pockets of ordinary consumers, and foreign exchange has become ever more scarce as importers have increasingly become desperate for foreign exchange to pay for essential inputs.

One cannot buy property in the suburbs, a motor vehicle, domestic capital goods or even groceries down town, without being asked to pay in cash (local bond notes) or a lower price in US dollars cash.

Coins are virtually unacceptable in many small retail outlets in most parts of downtown Harare. Where one is transacting on electronic platforms such as Ecocash and bank card facilities, the prices can be significantly higher.

It is from this angle that we have to continue to dialogue and propose solutions to the currency market distortions, which will not go away by themselves. There is definitely need for government’s immediate and deliberate attention.

An important question we have to ask ourselves is: “What we are losing as an economy by allowing the continued ‘mis-pricing’ of a vital resource such as foreign currency?”

In the first instance, the multiple tier pricing system that I have alluded to is manifest of the price distortions that are in the source foreign currency markets. Secondly, the currency regime that we have in place imposes an implicit tax on earners or generators of foreign exchange due to the fixed official peg between local dollars (bond notes) and the real US dollars (Nostro dollars and USD cash).

The economic value that is supposed to accrue to generators of foreign exchange is accruing in large part to informal currency traders and speculators on the parallel market. Bear in mind a great many importers with genuine foreign currency needs have to meet their needs using the informal foreign currency markets. This is not desirable.

The currency distortions have created pockets of opportunity and potential for rent seeking behaviours in the formal markets due to the scarcity factor. Those with privileged access to foreign exchange can and will take advantage of the currency shortages to enjoy “rents” earned via premiums on foreign currency obtained at the official exchange rate.

Lastly the shortages have resulted in economic “dead weight loss”. This is the lost economic value (welfare) due to inherent economic inefficiencies accruing to no one in particular.

Let me conclude today’s discussion with a disclaimer. The import or intent of my analysis, is not to denigrate or to attack the export promotion policies of the central bank, but merely to point out the inherent downsides of the bond notes, which in large part are merely indicative of how deeply embedded in our psyche, the general view is, that in the short to medium term, our economy is no longer determined by our own contextual factors.

We must accept that Zimbabweans have increasingly become global in their economic outlook and now have a predisposition towards accepting the economic systems and realities of those countries that they admire, including the United States of America, whose currency we should as a necessity, stubbornly hold on to if we are to fix our own economy to a point where the sins of the past 15 years are forgotten.

Without doubt, the current foreign currency liquidity challenges can only be resolved in the short term through enhanced access to lines of credit, sustained growth in inward remittances; portfolio investment flows and grants and in the medium to long term , through the growth of exports, which themselves are a function of greater investment and productivity.

In this regard there is urgent need to review the negative costs and uncertainty that has been visited on the economy by the introduction of Bond notes. The instrument, which had the dual purpose of stimulating exports and ameliorating cash shortages, seems to have had the unintended consequences of inadvertently driving hard currency out of circulation through the operation of normal laws of economics.

As a result we have seen further dislocations in the macro-economic environment, manifesting as a resurgence in harmful parallel market activities fuelled by speculation. There is need for Government to immediately institute measures to restore the integrity of the multi-currency system in order for confidence to return.

As we are all aware, the Zimbabwean economy has split into various segments. Most retail transactions are now taking place via Ecocash (mobile money) and RTGS and Point of sale electronic bank balances. Meanwhile, the larger transactions are being conducted in foreign currency cash, bank nostro accounts (for imports ) or offshore transfers.

There are therefore two types of “US dollars” in the market and parallel exchange rates between those two types of “US dollar” are being largely determined by a non-transparent underground market. Since the introduction of bond notes, the Zimbabwe economy has effectively been undergoing a process of “internal devaluation”, as local transactions have been ‘repriced’ or re-denominated into a weaker form of US dollars represented by bank balances and electronic (mobile money).

Because this process is being driven by translucent informal market forces that have been forced to operate outside the official financial system, it is fraught with, speculation, exploitation and corruption.

It is therefore highly inefficient and costly. Importers (including manufacturers that import raw materials) who have genuine demand for foreign exchange have been forced to meet their foreign currency needs through rent-seeking intermediaries at horrendous premiums.

At the same time, exporters are forced to repatriate their hard earned forex proceeds at a much lower premium. The RBZ “export incentive” of between 5 percent and 10 percent is not adequate to cover the gap.

In conclusion, we note that real economic activity in the economy is being subverted by host of survivalist activities such as sourcing cash, waiting in foreign currency queues and other activities that are a drain on productivity.

The options to me are very clear. We should either abandon the fixed exchange rate regime altogether and float the RTGS money against real US dollars. This is simply accepting that we have brought back a Zimbabwe dollar.

Alternatively, we should simply officialise the fixed exchange rate regime at some other rate other than the one to one peg. This will entail ring-fencing export proceeds and other foreign currency earning in separate Foreign Currency accounts in the banking system, (FCAs). These accounts will represent genuine foreign currency reserves as they will be matched completely with the available total sum of bank Nostro balances at any given point.

Strong consideration should be given to the growing sentiment that bond notes should either be demonetised without delay, or formalised as a new Zimbabwean dollar. It is now clear that our experiment with partial dollarisation is bringing the economy more hurt and pain that we can bear.

The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the writer is associated with.


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