Has Zimbabwe resolved currency issues?





HARARE – Since the emergence of hyperinflation circa 2008, Zimbabwe has tinkered with a number of currency options in an effort to avoid the pitfalls and excesses of that era.

By Tawanda Musarurwa

Over the intervening period, the country’s fiscal and monetary authorities have staggered from a managed float, to a free float, to a fixed rate and now to an auction system as they sought for the proper recipe.

All things being equal, experts say the success of any currency reforms must be underpinned by the implementation of an effective overall monetary policy framework supported by market-determined interest and exchange rates, together with prudent fiscal policies.

And all these measures seem to be in place with the Zimbabwe dollar — United States official rate range-bounding around 80 for the six to seven months.

But the continued existence of the illegal foreign currency market, with premiums still way beyond market levels, means there might be some factors that need correction.

“As an analyst I would say no, the currency issue hasn’t been completely resolved because the premium on the parallel market, is now between 35 percent and 40 percent,” said one observer who spoke on condition of anonymity.

Although the Reserve Bank of Zimbabwe (RBZ)’s foreign currency auction system has stabilised the official rate and thereby brought about general pricing stability and discipline in the market, there are still businesses that find opportunities in “playing” with the currencies, especially as Zimbabwe currently allows the US dollar as legal tender for transacting.

The huge disparity between the official rate and the parallel market rate has seen a rise in these “games of speculation”.

Association of Investment Managers of Zimbabwe chairman Jubelah Magutakuona, has pointed to some of these misdemeanours.

“Exporters (are) actually generating US dollars and you would imagine that someone earning US dollars would be comfortable to borrow in US dollars, but they would rather borrow in Zimbabwe dollars and then convert it into US dollars, do their business and then hold Zimbabwe dollar obligations,” said Mr Magutakuona.

“But if you are borrowing on a fixed rate arrangement in Zimbabwe dollars and then there is currency depreciation, one tends to make huge profits just on playing currencies alone. Because of that reason, we have seen reluctance on the part of US dollar borrowers, which is hindering the fixed income space from generating traction although the infrastructure is already in place.”

And the speculative tendencies appear to be rooted in the history of foreign currency management in this country.

Economic analyst Persistence Gwanyanya seeks to explain: “With the current structural makeup of the economy, it appears the only potent variable at RBZ’s disposal to manage the supply and accessibility of foreign currency is the statutory surrender requirement, which is the proportion of foreign currency exporters compulsorily sell to RBZ at the stated exchange rate. RBZ has always relied on the surrender requirement to increase supply and therefore accessibility of foreign currency.

“It is always advisable for policy makers to base the decision on optimal exchange rate on the tradeoff between higher surrender requirements and need for longer retention period, which is the period an exporter can hold the remaining foreign currency before being required to liquidate the same by RBZ,” he said.

“Normally this tradeoff is taken care of by an efficient price/exchange rate discovery mechanism. That is why modern economies such as South Africa, which, like Zimbabwe, is also commodity dependent, are comfortable with the regulation to liquidate the full amount of foreign currency into local currency (Rands for South Africa) upon receipt of the same.

“However, where price discovery has been inefficient, like in the case for Zimbabwe, the tendency by exporters is to privatise the foreign currency as they feel it’s not correctly priced by the market and are concerned about challenges to access foreign currency when they need it.”

This brings into question whether it is better to use a single currency system, or a dual or multiple currency system. The latter appears more attractive to currency speculators.

The Zimbabwe dollar was re-introduced after a 10-year hiatus through Finance Act No.2 of 2019 and Statutory Instrument 212 of 2019, which provide for exclusive use of the Zimbabwean dollar to settle all domestic transactions, as well as penalties for failure to do so.

Adjustments have since been made, through several statutory instruments (SIs) to allow for US dollar transactions. – Sunday Mail