HomeBusiness DigestEnemy No1: the volatile exchange rate

Enemy No1: the volatile exchange rate

IN the latest monetary policy review (MPR) the Zimbabwe dollar was adjusted against US$1 to $17 500. Within a few days the parallel market rate moved to within $40 000.

serif”>It is important to note that the rate had not moved materially before the MPR, and from this it can be deduced that that movement was not caused by sudden changesin the market forces of demand and supply.

Prior to the MPR, the parallel market value of the US$ was approximately $18 000 while the auction rate was $10 500. This comparison demonstrates that the parallel market rate operates on a premium to the “official” rate.

The problem of the parallel market is an issue that seriously needs to be addressed as it has downstream negative effects for the economy.

In the same vein, it must be understood that a parallel/black market for any commodity exists when it is in short supply. The way to destroy the parallel market is to strengthen the performance ofthe official market and therefore devaluation or adjustments will becomeunnecessary. Only four years ago the parallel market value of the Zim dollar against the greenback was$300.

Back then it was generally agreed that even at this parallel rate the local currency was undervalued, but with the official rate at $55, the market was placing both a corrective premium to adjust the rate to realistic levels as well as a risk premium – in the event that if one got caught trading, it was the while.

By July 2002 the official rate was still $55,04 while the parallel market rate was $650. In three years the official rate is now $18 500,41 and the parallel rate is $40 000. This clearly shows that there is a foreign currency crisis.

Some technical and fundamental analysts are predicting an auction rate of over $100 000by the end of the first quarter of 2006.

But there must be a solution and such solution must be actively pursued today. It would be a sad development if we nostalgically look back at the past three years ofdifficulty as “the good old days”. The solution is there but it is not close at hand. In fact, it is moving further and further away with each day of delay. Most of Zimbabwe’s current problems would be taken care of with a steady supply of foreign currency.

Over the past few years we have moved so far from where we were, which itself was far from where we were headed, that what we are going through now will be with us for a while yet. What this calls for is action now.

If action had been taken three years back we would be at a different leveltoday. It is interesting to note that Zambia went through a similar period when there were undue restrictions on foreign currency and significantparticipation by the state in the economy.

When the markets were liberalised and the government took a regulatory role there was a crash of the Zambian kwacha against major currencies (from US$1:ZK60) but that was 15 years ago!

In the ensuing period the government of Zambia enforced bold market-based policies not dictated by the West, and today the Zambian kwacha is one of the most stable currencies in the region, trading both in Zambia and internationally at an average of ZK4 350 to the greenback.

Today the kwacha is stronger than the Zimbabwean dollar! Economic history, from our own Rozvi State to the modern G8 nations, has demonstrated that there is nothing thatcan beat a free market, and free market policies need to be actively pursued to correct the disparities currently existing in our market.

It is the exchange rate that is the country’s number 1 enemy and all stops must bepulled out to fight it. We remember well the abolishment of trade in US dollars in early 2004 because the Zimbabwean dollar was the legal tender of the country. The private sector’s innovation had seen that dollarising was the only way to go and real estate, fuel and other commodities were quoted in the US$, to give a semblance of stability.

It appears we are now moving back to the days of late 2003 with the introduction of the payments of PAYE in foreign currency, fuel being purchased in foreign currency; the economy is slowly dollarising and soon most key costs (electricity, water, toll roads) will be charged in foreign currency.

As with fuel today, he who has foreign currency, knows no shortage. Foreign Direct Investment (FDI) is one way of ensuring that there is a steady supply of foreign currency.

While the country has resources that could easily give it a positive balance of trade, without capital equipment (which itself needs foreign currency) we cannot convert these resources into the hard currency we seek.

Over the past two years, private sector involvement in national development has been relegated as the nation has monopolised the salivation of our state to the Asian giants. While this might be noble, no economic turnaround has succeeded with the involvement of foreign powers in conjunction with the government alone. The local private sector needs to be involved to safeguard the local interests.

We are not taking the Asian model, but bringing the Asians themselves, whose interests are to safeguard their own commercial interests. Soon we will bring them in to resuscitatethe Feruka Refinery and to manufacture ethanol for us, all things the private sector can do with a little help. Private sector innovation is now regarded with suspicion in Zimbabwe, whereas foreign innovation is hailed.

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