Zimbabwe will continue reeling under the existing currency volatility for as long as production capacities in the manufacturing sector are not dealt with as well as distortions around the multiple official exchange rates remain in place, according to observers.
By Oliver Kazunga
In recent months, the exchange rate has largely been stable owing to interventions that include tightening of the monetary policy, fine-tuning of the auction system as well as transfer of external sector obligations from the Reserve Bank of Zimbabwe (RBZ) to Treasury.
However, in the past few weeks, the market has been characterised by currency volatility where the official exchange rate this week stood at US$1: $5 898 from last week’s rate of US$1: 5 591.
And economist, Professor Gift Mugano noted: “As long as we don’t address production, we’ll not be able to address the issue of currency volatility because the basic principle is that the strength of a currency is reflected in the country’s production capacity.
“Our production capability has to go up and what is then important is for us then to say, what undermines production capabilities. Distortions are one of them and I still have concerns around multiple official exchange rates; we have a willing buyer-willing seller exchange rate, official exchange rate and the auction exchange rate.
“I have a sense that these exchange rates aren’t truly liberalised and there is no question about that. We also need a mechanism where we need to have an environment where people can walk into the bank and get foreign currency because the willing buyer-willing seller should not just be for people to come and sell foreign currency in the bank, the market should be a complete market where l can buy and sell.”
He said at present no one can walk into the bank as an individual and use RTGS to buy foreign currency resulting in people turning to the parallel market to buy forex whose rate this week stands at US$1: $7 500.
“As long as the Government cannot create markets which are efficient and working properly, we will not have a stable exchange rate.
“Right now our exchange rate is kind of holding back because we are managing the auction which is close to the parallel market by not paying contractors.
“If you check there is enough evidence that contractors are not being paid and some of them are actually getting out of their sites and work has stopped, and this means that the moment that the Minister of Finance begins to pay, the exchange rate will go up,” said Prof Mugano.
Recently, it has been reported in some sections of the media that Government’s infrastructural development projects are being threatened as contractors contemplate pulling out due to unpaid monies amounting to a staggering US$150 million.
Such infrastructural development projects include those under the Emergence Road Rehabilitation Programme like the rehabilitation of the Harare-Masvingo-Beitbridge Highway.
Zimbabwe has largely been regarded as having a high country risk profile, a situation that has seen global markets being cautious about lending to the southern African nation.
It is against this background that the local monetary authorities have been allegedly forced to print high volumes of money to support the various infrastructure development projects across the country by the Government.
“So, one thing to have is proper markets for finance, exchange rate, infrastructure projects; let’s create a bond market for that (infrastructure development programmes), and finance infrastructure projects from the bond not to use cash.
“Our current mechanisms are actually fuelling currency instability over and above external shocks like drought, our policies are disturbing production,” he said.
In a separate interview, another economist, Eddie Cross, who is also a former member of the Reserve Bank of Zimbabwe (RBZ) Monetary Policy Committee, said currency volatility is a central issue confronting the economy with the Government expected to find an imminent lasting solution.
He said if currency volatility is not addressed, this would continue to wane the standard of living for ordinary citizens.
“The solution to that (currency volatility) is well-known. It’s not a question that we need to invent the wheel, all our neighbours have been able to stabilise their currencies and they were in a much worse position than we are from a macro-economic point of view.
“This is because we have a Balance of Payment (BoP) surplus and we’re not having to print money to finance Government and there is no reason why this instability in our currency should continue,” said Cross, adding that there is a need to seriously consider introducing a much more standardised process of trading Zimbabwe’s foreign currency earnings, which model other countries have adopted.
Under that model, he said foreign exchange will be traded freely in the domestic market allowing the country to move towards a sole currency, which would be the Zimbabwe dollar.
This, he said, has to be achieved as quickly as possible to stabilise and strengthen the waning Zimbabwe dollar, which has the potency to bankroll the country’s economic recovery.
At present, Zimbabwe is using a multi-currency system that is denominated by the United States dollar.
Last year, the Government enacted legislation to entrench the multi-currency system, making both the greenback and local currency legal tenders for all domestic transactions for the duration of the National Development Strategy 1 (NDS 1), the Government’s five-year economic blueprint running up to 2025.
Asked his view on why it is seemingly taking long for currency volatility to be addressed, Cross said:
“I can only think, its elements (a powerful and influential group of people) in our society that are benefiting from this problem because our people are making a lot of money by doing nothing; they don’t produce anything but simply trade currency.
“Those people really aren’t the kind of people who can deliver growth and deliver jobs and standards of living for the people of Zimbabwe. We need to silence the voice of such people, all our neighbours, (Zambia, Mozambique, Botswana) have done that and there is no reason why we shouldn’t do it.”
Another economist, George Nhepera, said while the war against currency volatility has been in existence for a long, time, and it can only be settled if fundamental issues related to the macro-economy are fully addressed in tripartite meeting of minds between interested parties such as the Government, private sector and parliamentarians representing the public.
“The monetary authorities working alone without these other crucial stakeholders to the exchange rate determination may take long to restore currency stability.
“This is a bipartisan approach we see in other modern states working well to ensure restoration of confidence in economic matters that affect the economy.
“Currently, there is discord or rather divergent views on economic policies between the Government, private sector and parliamentarians which is unhealthy for the country in moving forward,” he said. – Business Weekly
