Rates madness melee

14 Oct, 2018 - 00:10 0 Views
Rates madness melee

The Sunday Mail

Martin Kadzere
CONTINUING to peg the US dollar at par with the bond note has drawn mixed views among economists, with some calling for the surrogate local currency to float freely with the multi-currency system while others are of the view that such a move will be suicidal.

Finance and Economic Development Minister, Professor Mthuli Ncube and the Reserve Bank Governor Dr John Mangudya have said the bond note will remain at par with the US dollar.

Meanwhile, the African Export and Import Bank (Afreximbank) has offered Zimbabwe a facility to guarantee the convertibility of real-time gross settlement (RTGS) bank balances into US dollars.

This comes after the RBZ directed banks to separate foreign currency accounts from RTGS accounts.

As a result, in the past few days, the value of the bond note and the RTGS banks balances against the US dollar has been heavily eroded on the parallel market.

The rates went up to as much as 500 percent, but sharply declined towards end of week.

The public reacted by engaging in panic buying as prices sharply increased.

In an interview with The Sunday Mail Business, economic consultant Mr Ashok Chakravarti said allowing the bond note to float freely would be a major step towards re-introduction of the local currency.

“Introducing the local currency will take longer but immediate solutions are needed,” he said.

“The market is already showing what measures are supposed to be put in place. The Reserve Bank should remove the peg between the US dollar and the bond note and allow it to trade freely. All the bond notes at the borders will come back and this will improve the availability of cash.”

Mr Brains Muchemwa of Oxlink Capital concurred, saying fixing the exchange rate in the face of disequilibrium emanating from excessive RTGS balances chasing a few US dollars is not sustainable.

He said policy makers should allow the rate to freely float to protect businesses, jobs and consumers from illogical and inefficient speculative pricing.

“If left unattended, the current wave will result in businesses failing to preserve working capital, thereby resulting in shortages of goods and services,” said Mr Muchemwa.

“The option to allow prices to be referenced and denominated in US dollars in the context of a multiple currency environment will allow bond note to freely compete for relevance while ensuring a predictable and stable environment that allows business to plan.”

However, economist Dr Gift Mugano argued that floating the exchange rate would be suicidal.

“Those calling for the float are obviously assuming that we are in a normal situation,” Dr Mugano said.

“You only allow market forces to come into play when there is enough demand which is matched by corresponding supply. In this context, the markets will be efficient in regulating itself through the invisible hand of demand and supply.

“In our case, demand for foreign currency is exceeding supply and any effort to liberalise RTGS and US dollar accounts or rates will be tragic as account holders will move all their excessive RTGS balances into the market to chase the few dollars, which will result in skyrocketing of exchange rates and an inflation spiral.

“The exchange rates, which will come into force as a result of the float, will rise faster than we are seeing today and will definitely hit the roof, leading to the collapse of the economy.”

Dr Mugano said it must be noted that Zimbabweans are “rational economic agents”, who always look for arbitrage opportunities whenever there are shortages.

“Their reaction is always informed by past, current and future information available. In doing this, they (Zimbabweans) always read how past policies, for example, created opportunities for them.

‘‘In the same vein, policy makers must always endeavour to understand how the economic agents react to new information which comes with policy.

“Just last week, the Reserve Bank of Zimbabwe separated the RTGS accounts from nostro FCAs accounts, which saw the economic agents in the parallel market raising foreign exchange rates between the two accounts to over 500 percent.

“From a technical point of view, there was nothing wrong about separating the accounts.

“However, in reality, it became a problem because the separation was admission by the monetary authorities that the RTGS balances are not real currency. That is the reason why it was quickly devaluated by the market.

“So based on this precedence, I don’t see the economic rationale of floating the RTGS and nostro accounts. Rather, the central bank must intervene by injecting fresh capital that is substantial or undertake currency reforms.”

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