Parallel rates punish economy
ZIMBABWE’S parallel foreign currency market, which the government has unsuccessfully battled to terminate despite its inflationary effects, is once more a dominant feature of an economic crisis that has ravaged the country
for the last six years.
There has always been significant official attention on parallel foreign currency activities by the government and its monetary agency in the last six years, but events over the last few days should draw not only attention but shame on a government that has failed to deal decisively with the country’s economic problems despite its claims to the contrary.
Our defenceless currency has lost ground significantly over the past month on the parallel market, while the exchange rate on the official interbank market has remained stagnant, despite increased inflationary pressures in the economy.
Prices of basic and non-basic commodities have soared considerably during the same period, reflecting the fact that industry and commerce are factoring the parallel market rates in their pricing systems.
Indeed parallel exchange rates have had an enormous impact on the economy.
Continued increases in the premium on the parallel exchange market have encouraged the diversion of exports from official to unofficial channels.
Importers have been forced to source foreign currency from the parallel market because the official market is literally dry.
This has pushed up the domestic prices of imported goods as prices are determined by the parallel rate.
But clearly the emergence and persistence of the parallel market can only be attributed to skewed economic policies by government.
The traditional government approach to the crisis has always been to blame economic saboteurs for spawning the parallel market and fuelling the economic crisis.
This narrow-minded attitude has evidently ignored the heart and soul of parallel foreign currency market activities, resulting in futile efforts by the government to destroy the market through police raids on individuals and companies suspected of dealing in foreign currency and prosecution of firms failing to remit foreign currency on time.
Zimbabwe, which adopted an open market economy when it undertook International Monetary Fund (IMF)-backed economic reforms in 1991, still possesses rigid exchange restrictions prompted principally by its external indebtedness and increasing non-creditworthiness made worse by the depletion of international reserves.
The country’s reserves have suffered significantly due to dwindling export receipts. Once the country embarked on controversial land reforms in 2000, agriculture, the bedrock of the country’s export sector and the economy, suffered historic losses.
The country’s agriculture-dependent manufacturing sector was affected, again resulting in a reduction of exports.
The fixing of the exchange rate, despite high inflation levels evidently eroding the value of the domestic currency, has had the effect of making Zimbabwe’s exports uncompetitive in foreign markets.
Moreover, the high costs associated with production in a hyperinflationary environment mean that exporters have to cash their foreign currency on the official market at rates that do not make exports profitable.
This has restricted access to official markets by exporters leading to the emergence of an illegal parallel market.
The parallel market has consequently grown in significance as the authorities respond to a deteriorating balance-of-payments situation by tightening and extending controls rather than devaluing the official exchange rate.
As a result, Zimbabwe’s currency has become persistently overvalued on the official market and this has discouraged exports.
The parallel market, which has responded rapidly to macroeconomic developments, has therefore become the preferred channel for disposing of foreign currency by both exporters and individuals.
It is important to note that officials from both the government and the central bank, who have vigorously defended the skewed exchange policy and condemned the parallel market, have themselves been key traders of hard currency on the parallel market.
This is an acknowledgement that the official market rate is unrealistic and that a decisive resolution to deal with the current crisis should be undertaken.
Parallel rates punish economy