Since the introduction of the auction system in the foreign exchange market, the black market rate has stabilized at around US$1: ZW$120. Also, the official exchange rate seems to be stabilizing at around US$1: ZW$83 as of the latest auctions. However, the question that has been left unanswered is whether the stability in the exchange market can be attributed to the new system.
By Ronald Tachengetwa Puwai
Evaluating any policy instrument requires that we infer upon its objectives. Success is only ascribed if the instrument has managed to accomplish the prescribed objectives. For our case of the auction system in the foreign exchange market, basically they are two main objectives; the elimination of allocative inefficiencies and inequality of using the priority list, and the absorption of the black market into the official mainstream through economic incentives rather than
the unenforceable legislature. Thus the auction system will be evaluated based on its ability to have succeeded in accomplishing the above-stated objectives.
The first objective of doing away with the priority list was never pursued since the auction rules released by the Reserve Bank made it clear that foreign currency will be allotted to winning bids based on the Import Priority List. The question to be asked is the possibility of a market that excludes other buyers to set an equilibrium price for the whole economy. Our version of the auction system can therefore be viewed as nothing more than a sugarcoated priority list system
where devaluation is made to look like depreciation, thus meaning the US$1: ZW$83 is a preconceived exchange rate.
The above conclusion is further buttressed by the failure of the policy to meet the second objective. The introduction of the auction system should witness the depreciation of the official rate and an appreciation of the black market rates till they converge at a lower than the previous black market rate, thus the absorption of the black market into the official economy. With the existence of the Import Priority List, it means other demanders of foreign currency are left out.
Considering that the larger part of the economy is informal, this implies that those left out are a significant proportion thus creating a fertile ground for the existence of the black market. This coupled with the low levels of supply of foreign currency in the official market makes the goal of black market absorption an almost impossible task. The auction supply even falls short of the much underestimated US$100m which the authorities say is required by industry and for critical
imports. At an average of US$15m per week, the auction can only supply about two-thirds of that amount.
Source of Stability
To assess the sustainability of the current stability, it is imperative that we establish the source of it and remember the above arguments have ruled out the introduction of the auction system as the source. With the supply of money has very small, near to zero, the elasticity of supply, the source of the stability in the economy is therefore a demand phenomenon. The economy has of late witnessed a reduction of people holding the local currency demanding the US$.
The reduction is mainly due to the tight money supply control by the central bank and currency substitution.
The tight monetary policy has ensured that they are no unearned ZW$, created out of thin air, that are competing with earned money in the foreign currency market. The lack of confidence in the ZW$, due to its inability to perform its store of value function means whatever amount of
ZW$ poured in the market is used to purchase the US$ which is a better subtle device to link the present to the future. This argument is consistent with the “too much money chasing too few goods”, with a fixed supply of US$ in the economy any increase in ZW$ supply will lead to the price of the US$ in ZW$ terms to increase. Thus any given ZW$ supply has its price for the US$, meaning that if left undisturbed the price also remains unchanged.
The amendment of SI 142 of 2019 by SI 61 0f 2020, SI 85 of 2020, and SI 185 of 2020 means that both the US$ and ZW$ are now legal tender in Zimbabwe. The situation is called currency substitution. Economically this can be explained by Gresham’s law of good money substituting bad money. Currency substitution has led to a situation whereby the majority of the US$ demanders are now getting the US$ straight from customers by simply pricing their goods in US$.
With most fuel dealers now charging in foreign currency and most prices in the informal economy are in US$, the demand for US$ by ZW$ is now reduced, thus a stable exchange rate in the black market.
The above scenario is clearly not compatible with the objective of de-dollarization which the central bank is saying to be implementing rather they seem to be a reversal of SI 142 of 2019 putting the economy in re-dollarization mode. However, there is a positive to be taken from the current stability as it gives us as a country another chance to come up with a de-dollarization strategy. Also from the same discussion, it is clear that any strategy to de-dollarize needs to come
up with equally good money to replace the US$ if the stability is to be sustained, thus focus should be on establishing the moneyness of the ZW$.
Establishing the moneyness of the ZW$
The moneyness of money, that is, its value, its acceptance as a medium of exchange, is a matter of social convention. People accept payment in money only because they expect others to accept it in payment from them now and in the future. Therefore, to elevate something to the status of money a social convention must be established. Below are interventions to increase the confidence of Zimbabweans in the local currency in the process increasing its moneyness;
INTERVENTION EXPECTED IMPACT
1) Re-institutionalization of SI212 of 2019
– ZW$ to be the sole legal tender
– Amend the SI to include a ban on the withdrawal of US$ cash from banks by both corporates and individuals
– ensures the normalization of the economy whereby foreign currency is only demanded imports
– increases the supply of US$ in the formal market whilst at the same time closing the black market supply tap
2) Introduction of a wholesale Auction System to replace the current retail one
– Only banks to participate in the auction
– Bureau de exchange to buy from individuals and to sell to only banks through the auction
– Corporates and individuals to buy from banks
– Efficient in the management and distribution of large volumes of transactions.
3) Bank use promotion
– freeze of withdrawal charges, monthly bank charges, transactional charges
– removal of the tax on mobile money
– introduce inflation adjustable interest rates
– encourages people to bank their money since it maintains its value or actually increases in the form of savings accounts
– encourage savings
4) Creation of a sovereign fund to be diversified amongst gold; foreign investments; foreign currencies
– Funded through a natural resources tax
– Used in foreign currency market intervention
– Guarantee the convertibility law
– Sustainable stability in the foreign exchange market
– Increase in foreign currency supply due to an increase in foreign investment
– Increase in credit ratings making it easier to borrow on the foreign market
However, it needs to be noted that the above cannot do the magic alone, it has to be buttressed
with a sound fiscal policy, innovative investment policy, and research-based industrial policy.
Truly there is light at the end of the tunnel, however, this is not a conventional tunnel that can be navigated by conventional means.
Ronald Tachengetwa Puwai can be contacted at email@example.com or +263 773973321