Zimbabwe cannot go the Zambia way to stabilise its currency because situations are different





Zimbabwe cannot stabilise its local currency the way Zambia or Uganda or Tanzania did because their situation was different.

This was said by Finance Minister Mthuli Ncube in response to questions in the Senate on Thursday.

“Zambia was never in our situation, which is a situation where you have debt arrear, sanctions, whichever way you look at it. This is a very unique situation where you have no access to credit lines,” Ncube said.

“We have a situation right now where we have paid off IMF but the IMF is not allowed by law to give Zimbabwe anything but we do not owe them. Why? Because we owe the sister institution, the World Bank something. So, Zambia was never in that situation of being shut off in terms of access to credit lines.

“Therefore, it was enough for Zambians to just focus on fundamentals, get their budget deficit right, re-engineer their monetary policy in the same way we have done and do all the macro-economic actions that are taken when you have a challenge with your currency.

“That was enough and they are where they are now but even they are not yet there by the way as I speak, this is public knowledge so I can talk about it – they have a huge external debt which is currently under resolution.

“There are many other countries that have gone through similar situations as Hon. Sen. Gumpo has explained – we have Uganda in the mid 80s; Tanzania in the mid 80s too and a lot of other countries.  All these countries had one thing in common that they were able to go back because they were in a normal situation.  They just happened to be mismanaging something but in our case, there are certain factors that we are not able to deal with.

“If sanctions are put on you, you do not remove them yourself.  Someone has to remove them.  We are in a different situation and that is why we cannot easily do it like Zambia or Uganda, abandon the hard currency and move to our own currency when we are unsure of the source of the hard currency.

“One day we will get there but it has to be a process, otherwise as I said, you will create a situation where now everyone has to be forced to liquidate USD and only hold on to the Zimbabwean dollar.  I think that will be too soon for us to act in that way but the point is well made Madam President.”

Ncube also said it was time Zimbabweans accepted that there will always be a gap between the official exchange rate and the black market rate, especially when the black market rate is actually a forward rate.

“Sometimes we have to accept that maybe the gap will never be closed but we want it to be narrow. Perhaps we should not think that by somehow changing the system so dramatically, those two systems will merge. They might not and those are some of the things that we are noticing which will need further fine-tuning of the auction system and our forex determination system,” Ncube said.

Q &A:

HON. SEN. MUZENDA:  My question goes to the Minister of Finance.  I want to find out from the Minister what the challenges are if we were to let the US dollar be determined by market forces because at the moment, we have the auction rate; willing buyer-willing seller rate and the parallel rate.  This also brings challenges when people are buying because we have different prices for swiping, using ecocash and also if using cash.  I thank you.

THE MINISTER OF FINANCE AND ECONOMIC DEVELOPMENT (HON. PROF. M. NCUBE):  I thank Hon. Sen. Muzenda for that very important question.  The exchange rate is being determined by market forces.  When we established the auction, we were easily selling US$50 million but now we have come down to average US$25 million.  In fact, two days ago, we only sold US$7 million because the demand was quite low.  That exchange rate was arising from a Dutch Auction System, which means that you could go there and demand whatever exchange rate you wanted.  So that is ultimate freedom and choice.  However, we realised that perhaps even that expression of freedom and choice of your exchange rate, the price discovery process was still not good enough.  So we decided to go ahead and introduce the willing buyer, willing seller hoping for better price discovery.  We did notice that the exchange rate from the willing buyer- willing seller window is higher than the auction window.  As of Tuesday this week, we noticed that even the auction rate rose and we are noticing that they are approaching and converging.  So, we do believe in a market determinant exchange rate and we have taken certain actions to get to that market exchange rate.

There is no difficulty in having a market exchange rate because already if someone believes that the parallel rate is the market exchange rate, that is already what is determining prices in the shops and that is the challenge. It is no longer an issue in that sense but we are also noticing something that the parallel rate is not what we call a spot rate but actually it is reflecting the future called forward pricing. Someone is thinking that if I am going to replace this gadget in a month’s time prices would have moved and therefore I need to charge in such a way that I reflect the exchange rate in that one month’s time. So, it is reflecting the future.

When you think that the parallel rate is the market rate now, actually it is a market rate for the future, which means we also need to fine-tune some of our policies to deal with the notion of a forward rate rather than a spot rate. One of the reasons why the gap between the official rate, whether it is willing buyer willing seller auction rate and the parallel rate continues to be there, is because there is always a gap between a spot rate and a forward rate. It is always there in all the markets in the world.

Sometimes we have to accept that maybe the gap will never be closed but we want it to be narrow. Perhaps we should not think that by somehow changing the system so dramatically, those two systems will merge. They might not and those are some of the things that we are noticing which will need further fine-tuning of the auction system and our forex determination system. I thank you.

HON. SEN. CHIEF NGEZI: I heard the response by the Hon. Minister of Finance regarding the issue of parallel and official rate but the truth is that our people live with the parallel rate not the bank rate or Dutch system. Their livelihood depends on the parallel rate and my question is; why is it that those retailers who sell goods using the parallel market rate which is illegal are not sentenced or fined and are allowed to determine their own prices because what they are doing is the same thing with the street guy selling money because the effect is the same?

HON. PROF. M. NCUBE: The Hon. Senator basically asked why retailers who are using parallel rates to set their prices are not punished or disallowed as compared to money changers on the streets. Those in the shops are disallowed from using exchange rates other than the auction rate and as of this week, it is other than the willing buyer willing seller rate. In fact, we have set a variation margin of 10% either side of the willing buyer willing seller interbank rate. There are guidelines as to how pricing ought to be done.

As I said, the honey pot from deviation is deep, very juicy and sweet, so they keep breaking the law. You go after them, fine them and they break the law again. So, there is that aspect but there is a level playing field. We are not treating shoppers or retailers differently from money changers. The law applies to all. There is pari passu treatment in terms of the eyes of the law.

HON. SEN. GUMPO: My supplementary question to the Minister of Finance is how the Zambians achieved to stabilise their currency when they found themselves in this sort of situation some years back. I remember Zambians used to sell money on the streets but now they no longer use the USD but use their own local currency for transacting.

HON. PROF. M. NCUBE: I thank the Hon. Senator Gumpo for his question. Zambia was never in our situation, which is a situation where you have debt arrear, sanctions, whichever way you look at it. This is a very unique situation where you have no access to credit lines. We have a situation right now where we have paid off IMF but the IMF is not allowed by law to give Zimbabwe anything but we do not owe them. Why? Because we owe the sister institution, the World Bank something. So, Zambia was never in that situation of being shut off in terms of access to credit lines.

Therefore, it was enough for Zambians to just focus on fundamentals, get their budget deficit right, re-engineer their monetary policy in the same way we have done and do all the macro-economic actions that are taken when you have a challenge with your currency. That was enough and they are where they are now but even they are not yet there by the way as I speak, this is public knowledge so I can talk about it – they have a huge external debt which is currently under resolution.  There are many other countries that have gone through similar situations as Hon. Sen. Gumpo has explained – we have Uganda in the mid 80s; Tanzania in the mid 80s too and a lot of other countries.  All these countries had one thing in common that they were able to go back because they were in a normal situation.  They just happened to be mismanaging something but in our case, there are certain factors that we are not able to deal with.  If sanctions are put on you, you do not remove them yourself.  Someone has to remove them.  We are in a different situation and that is why we cannot easily do it like Zambia or Uganda abandon the hard currency and move to our own currency when we are unsure of the source of the hard currency.  One day we will get there but it has to be a process, otherwise as I said, you will create a situation where now everyone has to be forced to liquidate USD and only hold on to the Zimbabwean dollar.  I think that will be too soon for us to act in that way but the point is well made Madam President.

Source: The Insider