Digesting stabilisation measures

14 May, 2023 - 12:05 0 Views
Digesting stabilisation measures Persistence Gwanyanya

The Sunday Mail

Persistence Gwanyaya

One can only underestimate Government’s power at their own peril, as it has the superior power to make or break.

A reflection on drivers of volatility from May to July last year and the impact of value-for-money interventions is instructive.

Upon implementation of value-for-money audits in August 2022, currency and price volatility came to a shuddering halt.

The parallel market exchange rate, which was forecast to reach as high as US$1:$1000 by September, actually strengthened to July levels of US$1: $750-$800 immediately after implementation of the audits in August.

We enjoyed a period of relative stability to November 2023.

The parallel rate premiums fell from 140 percent in May to 10-20 percent by November 2023.

Interestingly, the Government admitted that it’s procurement processes were key drivers of instability.

Commendably, however, value-for-money interventions were implemented and the end result was there for everyone to see – relative stability.

Faced with the re-emergence of instability, Government had to act again.

The madness in the market cannot be ignored.

The Zimbabwe dollar exchange rate is on a free fall, having depreciated more than 90 percent this month.

Zimbabwe dollar prices are rising, eroding workers’ salaries, pensions and savings.

Equally worrying is the accelerated re-dollarisation of the economy, with the greenback now accounting for over 70 percent of local transactions.

The biggest losers are ordinary Zimbabweans and compliant business, mostly formal.

The informal sector can easily get way with non-compliance with regulations and laws.

Most of them are now exclusively trading in forex and, in some cases, pricing at or above parallel market rates.

Faced with a similar situation, any responsible Government would intervene, failure of which businesses, especially compliant ones, will collapse.

Similarly, ordinary citizens will bear the brunt of instability.

Government will eventually carry the burden.

Unsurprisingly, the latest interventions are focused on ordinary citizens and survival of compliant businesses.

The suspension of import permits, duties and taxes on eleven selected basic commodities, namely maize-meal, rice, milk, flour, salt, cooking oil, sugar, petroleum jelly, toothpaste, bath and washing soap, has generated heated debate.

Those who support the intervention base their argument on the destabilising behaviour of the market participants, which l explained earlier on.

These behavioural issues become systemic and it’s difficult to single out compliant businesses and individuals.

It appears Government believes the recent volatility is unjustified and not supported by fundamentals, including growth in money supply.

As such, there is urgent need to protect ordinary citizens from market instability by making basic commodities more affordable and available.

Compliant traders, who were finding it extremely difficult to survive the competition from smuggled products, feel relieved by the liberalisation of imports of basic commodities, which is seen as levelling the playing field.

Currently, the market is rewarding crooks, speculators and arbitrageurs at the expense of hard work and productivity.

On the other end are industrialists who strongly argue that suspension of permits, duties and taxes on the selected eleven products is not supportive of the re-industrialisation imperative.

They attribute the progress in local production, which has seen local products occupy than 80 percent of shelf space, to protectionist policies.

As such, they argue that opening up these basic products to international competition is a serious threat to industrialisation, no matter how short the period of liberalisation is.

This is what economists regard as infant industry argument, where young businesses who cannot compete comparably with imports need to be protected.

The current depreciation of the South African Rand seems to add weight to their argument, as it is making products from South Africa cheaper and more competitive in Zimbabwe.

Worryingly, there is an increasing trend of businesses capitalising on arbitrage to create value from nothing at the expense of large, well-established players.

This involves some informal businesses hoarding cheaper basic commodities priced in local currency at the interbank rate from large, well-established retailers and wholesalers, and immediately reprice the same in US dollars at parallel market rates.

This explains why customers are flocking to the “tuckshops” for their groceries.

A typical example of the product affected by this development is cooking oil.

This only underscores the need to prioritise stability more than any economic imperative.

Protectionist pundits also argue that liberalising imports of the eleven basic commodities will entrench dollarisation, as businesses have to look for forex to import these cheaper commodities.

However, liberalisation protagonists insist that the access of forex by the market is expected to improve following the enhancement of the Dutch Auction.

Fine-tuning of the auction system would mean the RBZ announces amounts of forex available for each auction.

The Dutch Auction system also operates on competitive bidding processes, and bids are supposed to be settled within agreed timeframe.

This is expected to restore confidence in the auction system, which was currently seen as an allocation mechanism.

However, presented with a situation of market failure, partly occasioned by the structure of the economy, which is concentrated within a handful and powerful individuals and corporates, the RBZ needs to keep a watchful eye on the market.

Left on its own, the private sector can spin the market out of control.

The improved functionality of the Dutch Auction system is expected to gradually close the gap between the parallel and official rates, thus stabilising the Zimbabwe dollar and reduce the risk of costly redollarisation.

Overall, despite all these arguments against opening up the economy to imports, Government still strongly believes that destabilising behaviours of market participants are the main force behind the recent instability.

As such, a short-term measure to correct these behavioural issues is necessary to restore stability.

It sees the period of six months as short enough not to cause serious damage to the local manufacturing sector.

If we can’t deal with stability, all we are trying to protect will be destroyed.

So instability is currently enemy number one.

Also mitigating the risk of redollarisation is the scraping of the 15 percent surrender requirement.

Given the widening gap between the formal and parallel market rate – currently more that 150 percent – domestic liquidation is now viewed as a huge tax on formal US dollar deposits, which entrenches redollarisation.

However, it is important to always bear in mind the initial motive for domestic surrender requirements.

This measure was necessary to discourage trading in forex for domestic transactions so as to avail forex for external transactions.

The proceeds from domestic surrender were being supplied to the auction system to meet the importers’ forex requirements.

Since Zimbabwe doesn’t print US dollars, domestic forex earnings can be looked at as “domestic exports”, which qualify them for surrender requirements, just like our normal exports.

This is why foreign currency earnings by the tourism sector were always subject to domestic surrender requirements.

Given the exchange rate premium of more than 150 percent, it doesn’t make sense to insist on domestic surrender, as its now discouraging the flow of forex into the formal system.

The arrangement to transfer external loans from RBZ to Treasury is in line with international best practice.

This frees RBZ to focus on operating the Dutch Auction system, whose source of forex is largely from export surrender requirements.

The mechanism of buying forex surrender is self-liquidating and, therefore, doesn’t give rise to threat of money creation by the Reserve Bank.

Put simply, RBZ buys foreign currency at the interbank rate to sell at the Dutch Auction system at interbank rate.

Treasury will then settle external obligations from its budget, which is a non-inflationary source.

In the event that Treasury is to secure forex from the market, it might have to use its Zimbabwe dollar budget, which is again a non-inflationary source.

Whilst monetarists argue that inflation is everywhere and anywhere a monetary phenomenon, this phenomenon is slightly different in our current case.

Currency depreciation is being perpetuated by dwindling Zimbabwe dollar demand.

That is why there is urgent need to boost the demand for the local unit.

Given that Government controls more than 70 percent of the market, the directive to Government ministries and agencies to increasingly accept the Zimbabwe dollar for payment of taxes, duties, levies and fees are welcome.

In addition to value preservation, the gold coins, both physical and digital, are seen as supporting the demand for local currency.

The subscriptions for the first issue of gold coins last week is quite encouraging.

RBZ managed to allot 139,57kg of digital gold tokens worth $14 billion or close to US$14m.

This amounts to about 10 percent of our reserve money, which is around $140 billion.

There are many wholesalers and retailers who have been excited by this product, which gives us confidence of high market acceptance for both transactional and value preservation purposes.

Overall, if the measures are diligently implemented, we are likely to see restoration of stability.

Going forward, there may be need for the economy to focus on permanent solutions to instability.

Confidence-building measures will be key.

*Persistence Gwanyanya is the founder and vision consultant of Bullion Group. He is also a member of the RBZ Monetary Policy Committee. He writes in his personal capacity. For feedback WhatsApp +263773 030 691

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