HARARE, Zimbabwe, – Renowned economist Professor Gift Mugano has called on the Reserve Bank of Zimbabwe (RBZ) to transition from its current “controlled exchange rate” system to a market-driven approach, arguing that such a move is essential for fostering a truly competitive currency and ensuring economic stability.
Mugano asserts that the government’s control over the exchange rate is hampering economic growth, as it keeps the official rate artificially low despite a severe shortage of foreign currency. “The first priority is to establish a market-driven exchange rate, not one controlled by the government,” Mugano emphasized.
He explained that basic economic principles dictate that when supply falls short of demand, prices naturally rise. However, in Zimbabwe, the official exchange rate has remained fixed at 13.7 Zimbabwean dollars to 1 US dollar, while the parallel market rate has surged to around 22 Zimbabwean dollars to the dollar. This wide disparity, he argues, undermines economic stability and complicates price discovery.
“Expecting the exchange rate to remain stable despite a foreign currency shortage is like expecting tomato prices to stay the same in Mbare Market during a scarcity,” Mugano remarked, illustrating the disconnect between the controlled exchange rate and market realities.
Mugano also highlighted the challenges faced by exporters under the current system. Exporters, who earn foreign currency, are often reluctant to sell it at the official rate, which offers them a portion of their earnings in local currency at a devalued rate. This situation forces them to miss out on the more favourable parallel market rate, leading to economic inefficiencies.
“Controlling the exchange rate creates shortages,” Mugano continued. “We need to allow the rate to reach its optimal or equilibrium level.”
In addition to advocating for a market-driven exchange rate, Mugano urged the central bank to align the printing of money with the nation’s actual economic demand. He cautioned against the current practice of introducing large quantities of new currency without adequately circulating it, describing it as “counterproductive.”
According to Mugano, the central bank’s focus should be on creating a stable and reliable currency that supports a smoothly functioning economy, rather than simply increasing the supply of money without a corresponding economic need.
Mugano’s recommendations come at a time when Zimbabwe continues to grapple with significant economic challenges, and his call for a shift in monetary policy underscores the need for reforms to stabilize the currency and promote sustainable growth.
Source: Business Weekly
