THERE is significant headroom for the foreign exchange rates to come further down, thereby reining in inflation and speculative price increases, but only if the Reserve Bank of Zimbabwe abides by Government policy to direct half the export earnings it statutorily retains to the interbank market, economists say.
The black market foreign exchange rates, which have been the primary drivers of the galloping inflation in the country since September last year, fell below the official interbank exchange rate only last month after the Government banned the multi-currency regime with effect from June 2.
While Government has so far done well containing runaway fiscal expenditure and started posting primary national budget surpluses, hitherto the major cause of inflationary pressures over the decade to 2008, pass through effects of black market currency premiums have caused relentless rise in prices.
As such, annual inflation has maintained an upward trajectory from a lowly 5,39 percent in September 2018 to 175,66 percent last month, as prices tracked the wild swings in exchange rates since currency reforms started late last year.
Economists are unanimous that the banning of the multi-currency, which outlawed the US dollar, British pound, South African rand and Botswana pula among others, as legal tender and reintroduction of Zimbabwean dollar, has helped reduce and stabilise prices and exchange rates. Zimbabwe had used US dollar dominated multi-currency basket, in order to stabilise the economy, since dumping its inflation ravaged unit in February 2009.
That regardless, significant potential remains for the exchange rates to come further down to about 4 RTGS dollars to the United States dollar provided, the Reserve Bank can make the interbank forex market work more efficiently by increasing its allocation of hard currency to the market.
Economist and former Bulawayo East Member of Parliament Eddie Cross said Statutory Instrument 142 had been a partial success in light of the relative stability in prices and exchange rates, having seen the US dollar rate peak at 15 to 1 prior to last month’s currency changes, over the last three weeks.
Mr Cross said with adequate supply of forex on to the market to meet exporters’ need there was latitude for the exchange rate to reduce further down to as low as 4 to 1, which would result in prices and inflation drastically dropping.
“I think SI 142 has been a partial success. Its principal objective was to stop the run on the US dollar, which had exceeded 15 to 1 at that stage (when the multi-currency was outlawed).
“It obviously has achieved that because the open market rate now is about 7 to 1 (cash) while the interbank market is about 9 to 1.”
However, Mr Cross said SI 142’s success had been limited by Reserve Bank’s failure to fulfil two essential elements in the programme.
“The first was the appointment of a monetary policy committee in terms of the Reserve Bank Act, which was announced back in February when they announced the interbank market.
“The purpose of the MPC was to give oversight to the monetary policy. In fact, the Act says the RBZ governor shall obey the advice of the MPC in his administration of monetary policy in Zimbabwe, that was a very important development and I think the Governor has really been (forthcoming in following Government policy on that front).
“The other one was that in SI 142 we provided for the Governor to put 50 percent of all foreign exchange retentions by the bank into the interbank market; that would have brought about US$6 million a day on to the interbank market and that increases the supply of foreign currency to the market,” he said.
Under such a scenario, Mr Cross said, the interbank market would be able to meet the entire foreign currency requirements of the country. “The Reserve Bank governor has not done that (allocating 50 percent of export proceeds to the interbank market), even under pressure of advisors and the minister.”
The central bank chief, Dr John Mangudya, has reportedly indicated he needed the foreign currency for other critical national requirements. Efforts to get a comment from Dr Mangudya were not successful yesterday, as his phone went unanswered.
Mr Cross said the RBZ receives a significant amount of foreign currency, about US$3 billion annually, which he said was enough to cover its critical import requirements, only if the foreign exchange get evenly and appropriately distributed among the wide array of competing national interests.
“In fact, SI 142 would not have worked without the Diaspora and the informal market because the biggest change that we have seen in the last three weeks has been Diaspora money coming into economy, its considerable; it’s about the same amount of money that goes to the Reserve Bank (US$3bn a year).”
Mr Cross said instead of feeding the black market, Diaspora remittances were going to the formal market and this was what had helped force the open market exchange rate significantly down.
Former Government of Zimbabwe advisor and ex-University of Zimbabwe professor of Economics Ashok Chakravati concurred that SI 142 had been a success thus far, pointing out that things could get better but more action was required.
“People are getting used to the mono-currency system and it will take some time (for things to improve) because we have had dollarisation for such a long time. People are used to the idea of bench marking prices in US dollars that is why we are having all these high prices and inflation,” he said.
The former UZ lecturer said the central bank was obligated to offload 50 percent of the amount it retains from exports onto the interbank market to aid rate stability and market price discovery, as opposed to leave it to arbitrage of the capricious open market.
“We have had some stability around 9/10 to 1 and it depends very much on the Reserve Bank supplying enough foreign exchange into the interbank market. If they keep the interbank market well supplied and exporters keep on selling forex, then we will have stability,” Professor Chakravati said.