Zim needs stable, dynamic forex regime

By Norman Reynolds

JM KEYNES made the all-important distinction: people, ideas and some goods and services must move freely between countries – but not goods and services that can be produced locally and cer

tainly not money. He argued for controls over capital flows so that each country could set interest rates according to domestic economic policy needs.


The massive structural shift to vast speculative capital flows does not affect rich countries as much as it does poorer countries. The reason is that developed countries, which set the rules, conduct very little trade compared with the size of their GDPs. For instance, the imports and exports of the US and the EU comprise a mere 15% and 14% of their GDPs. In the UK, trade makes up around 30% of GDP. As a small economy, 65% of Zimbabwe’s GDP is formed by exports and imports. Zimbabwe receives prices from the global economy. The flash of vast speculative monies easily distorts normal trade pricing.

The way foreign exchange is raised and distributed becomes crucial. With so many competing needs, an open system will not work. There are humanitarian (food and health) and general (fuel and electricity) needs that must be met. At the same time, the gross displays of consumer wealth an open exchange system allows are not to be tolerated. Non-essential imports should be curbed in favour of local production.

What is needed is a rapid recovery of those activities that earn foreign exchange and the creation of a large mass market for basic goods and services, that is locally produced items that have low foreign exchange requirements in their production and thus consumption.

Zimbabwe’s foreign exchange system is chaotic. It is a punishment to all citizens and businesses and rewards speculators and subsidises government loans at the expense of savers. Most people work to make the corrupt few rich while becoming impoverished in the process.

The orthodox foreign exchange market will not serve Zimbabwe’s recovery. It needs a system that recognises market forces, but does not naively believe that “free markets” are indeed free and thus are not a perfect solution.

A return to an orthodox foreign exchange regime would ignore the mismatch of the highly open nature of the Zimbabwe economy, unfair international trade practices and the dominance of speculative money flows.

It would also treat consumer goods as equal to essential imports. It would thus starve foreign exchange-earning sectors of access to abundant and cheap foreign exchange and hold back on essential services.

Four foreign exchange categories fulfil different purposes in the eco-nomy. They should be treated separately and the economy defended from difficult international conditions, at least until it has recovered.

* Exporters, tourism, and services must be allowed to maximise their foreign exchange earnings by optimising production and sales. They must be allowed to buy and then to repay all the foreign exchange they can use. The best method is for each sector to adopt “indicative planning”, that is a plan to optimise all relations within each sector. In Zimbabwe, agriculture would be one such sector. Under normal conditions, it earns around US$4 for every US$1 it uses. Tobacco, horticulture, beef etc have higher earnings ratios and must be helped to recover.

For agriculture, farmers, input and equipment suppliers, transport, banks, processors and trade agents, labour and the state agencies that form the agriculture sector would undertake a series of optimising circular or iterative discussions. “I, John, could double production and employment if….” And the response: “I could do what John requires if…” This exposes the bottlenecks and helps devote key resources to removing them.

If they are net earners of foreign exchange, they loan what they need, even from foreign banks. Foreign exchange is not allowed to be a constraint. Government or donors can guarantee such loans at very little risk. In this way, the financial capacities of donors and of the state are multiplied.

If funds have to be borrowed abroad, the interest rate would likely be lower than local rates, providing a cost savings, and there is little or no foreign exchange risk involved in this “market” as it earns the same currencies that were borrowed.

* The net earnings of foreign exchange by the first market is deposited into the second market of essential public goods. This secures the importation of essential “public and economic” imports such as fuels, transport equipment and medicines. As there is no premium to be paid for the foreign exchange, it keeps landed costs low. This helps establish a low cost structure to the economy that also promotes its competitiveness.

* Any balance left over from the import of essential public goods goes into the third market which provides foreign exchange for imports needed for local production. In bad times, the price of foreign exchange in this market will be higher than in the first two markets. This will instil discipline in terms of what is produced. However, the price will be higher in the market for consumer goods imports. This will act to favour locally produced items.

* The foreign exchange for imported consumer goods, holidays abroad, etc should be allocated by way of a monthly auction of the available balance of foreign exchange after the first three markets have been satisfied. Here the price of foreign exchange will be the highest providing a degree of protection for local production from competition from imported consumer imports.

The four markets have different foreign currency prices according to the economic value of their activities. The model values exports ahead of essential imports, aiming to “get the ball rolling” by earning foreign currency. It provides the means to buy essential imports as cheaply as possible to keep the domestic cost structure and inflation down.

It also provides for import needs for the local production of consumer goods and services and treats imported consumer goods as the lowest priority and thus with the highest foreign exchange prices, providing a degree of protection for local producers.

* Norman Reynolds is a prominent business consultant.

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