Equilibrium of the exchange rate needs holistic approach

Equilibrium of the exchange rate needs holistic approach
Published: 06 December 2018 (272 Views)
After being kissed by the devil, one must not be over excited. Instead, they have to count their teeth, lest one or two are missing.

Businessman and cleric, Shingi Munyeza was showered with praises by people who used to chastise him, accusing him of pushing Zanu PF agenda. The praises came after he posted on twitter, some ideas that resonate with the MDC narrative.

Dr Munyeza said in order to bring back credibility and confidence, the August Inquiry must be made public as soon as possible, cases of corruption must be expedited, MDC Alliance and Zanu PF must come to a negotiating table. The availing of the inquiry findings on public domain has been explained enough, so is the push for a dialogue between the two main protagonists.  As for cases of corruption, one has to be wilfully blind to ignore the arrest of big shots over the vice.

Munyeza said the United States dollar (USD) is not equivalent to the bond note. He also said Government must allow the selling of fuel in USD and open up fuel importation.

It is on the last two propositions that this writer disagree with Munyeza. There is a serious shortage of USD in the country and for one to suggest that the commodity must be sold in that scarce currency is a bit selfish. As a businessman, Dr Munyeza could be selling his products or services in USD, making it easy for him to purchase fuel should his suggestion is carried. He, however, forgets that a whole lot of motorists are still being paid in RTGS including those in critical service sectors like doctors. I guess he heard the Minister of Health and Child Care unequivocally dismissing the doctors' demand for payment in USD.

Those who eulogised Munyeza on social media for proposing the sale of fuel in USD were carried away by politics and forgot that they are still being paid in RTGS. Proposing to sell fuel in USD to the public that has no access to that currency is capitalistic. The fuel industry is being allocated foreign currency to procure fuel, thus, there is no reason to sell it in USD. Once fuel is sold in USD, everybody who uses it in the production chain will in turn charge their products in the same currency. Indirectly, Munyeza and the like-minded want to demonetise the bond note.
In his 2019 budget, the minister of Finance and Economic Development said the bond note would remain pegged at one as to one with the USD. However, there has been a relentless call to let the bond note float freely within the multi-currency system. Munyeza is one such voice that wants the bond note to be devalued.

The surrogate currency was introduced in 2016 as way of ameliorating acute cash shortage within the market. The challenges that birthed its introduction have not improved, thus its maintenance on the market on a 1:1 with the USD is still welcome. The bond note has been in use on equal footing with the green pack since 2016 without any problem. The problem only came after elections in which President Emmerson Mnangagwa won despite contestation by his closest rival, Nelson Chamisa. That shows that what is happening has nothing to do with economic fundamentals.

Devaluing the bond note would be tantamount to giving in to the saboteurs on the parallel market who are determining the exchange rate. Once that is done, the whole nation will be held at ransom by these saboteurs. They will peg the exchange rate anyhow and any time.

The principal objective for the introduction of the bond note was macro-economic stability especially on the formal exchange rate. The bond note/USD exchange rate must remain on a 1:1 so as to preserve values of people's salaries, pension, balance sheets of companies and financial institutions. In doing this, Government is trying to avoid a repeat of the 2009 scenario where savings were wiped away following the adoption of dollarization.

The excessive growth in money supply has been the major source of instability. There is excessive liquidity in the economy which is disproportionate with the quantity of physical cash circulating in the country and level of production within the economy. If this situation is not addressed, we cannot address the exchange rate challenges sustainably.

Government can achieve proper equilibrium of the exchange rate by dealing with twin deficit on the fiscal and current account front, money supply, excessive monetary expansion, interest rate differentials with trading partners, inflation differential with trading partner and purchasing power parity issues. Thus, the thrust of the Transitional Stabilisation Programme is to deal with inflation and instability by addressing these macro-economic challenges.

On fiscal deficit, Government is implementing cost-cutting and revenue generating measures. In his budget, Professor Ncube proposed the cutting of salaries for senior Government Officials and other luxuries are to be forgone.

The 2% taxi is to widen revenue source base. Revenue is being generated through reforming the State Owned Enterprises where others will be privatised, liquidated, departmentalised and listed on the Zimbabwe Stock Exchange. Bidders will buy shares and a windfall of $500 million is expected to be generated from the privatisation. Most of these enterprises have been perennially getting bailouts from Government.

So the issue of equilibrium of exchange rate needs to be addressed holistically. To just come up with figures as exchange rates without addressing the issues discussed here is sustainable. 


- John Sigauke

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