Erich Bloch: Forex Reforms Will Aid Productivity

IN last week’s monetary policy statement (MPS), the governor of the Reserve Bank of Zimbabwe (RBZ), Gideon Gono very courageously sought once again to address the devastatingly negative consequences of foreign currency shortages.

Government’s appallingly mismanagement of the economy for more than ten years has had catastrophic repercussions.

In the MPS Gono identified 20 key challenges to Zimbabwe’s domestic environment, over and above diverse global challenges which impact upon Zimbabwe.

Foremost of the local challenges enumerated by the governor, apart from the challenge of food shortages, was shortages of foreign exchange and, as a by-product thereof, fuel, electricity and basic commodity scarcities, as well as insufficiencies of agricultural inputs and compromised heath delivery systems.

Allied to all these challenges, he made reference to the export sector underperformance, due to “foreign exchange constraints”. (In fact, as wholly correct as that is, the underperformance occasioned by inadequate availability of foreign exchange has devastated the productivity of virtually all economic sectors, and especially so the manufacturing, agricultural, mining and tourism sectors.)

There have been innumerable causes of the paucity of foreign exchange that bedevils Zimbabwe, including government’s foolhardy, near-total destruction of agriculture, which has resulted in not only minimal foreign currency earnings, as compared to the wealth of forex that previously flowed from the export of tobacco, grains, beef, tea and coffee, cotton, and much else.

Compounding that predominant shrinkage of forex generation has been, amongst much else, the near total alienation of the international community in general, and first world developed countries, the Bretton Woods, institutions, and the international investment and banking communities.

In so doing, including recurrent failures of Zimbabwe to settle funding debts, almost all international financial aid has been withheld from Zimbabwe.

Balance of payments support was discontinued, aid was markedly reduced, banks withheld lines of credit, and foreign direct investment (FDI) dwindled to a trickle.

Zimbabwe has unhesitatingly accused, and vehemently condemned, the world at large for imposing “illegal” sanctions, albeit without foundation, save and except that the USA’s Zimbabwe Democracy Act obligates that country to veto funding to Zimbabwe by the International Monetary Fund (IMF) and the World Bank.

However, one of the greatest causes of the Zimbabwean forex drought is that government has steadfastly refused to recognise the need for foreign currency exchange rates to move realistically, in relation to inflation, failing which all viability of exports is destroyed.

The appropriate movement in exchange rates is a prerequisite for exporters to be able to recover inflation-driven increases in production and operational costs, failing which production for export is grievously impaired.

But government has dogmatically resisted meaningfully devaluations, obdurately ignoring the cataclysmic consequences.

As a result, at different times RBZ has desperately sought to address the issue, but its ability to do so has been severely restricted as, in principle, in terms of prevailing legislation, exchange rates are determined by the Minister of Finance.

The constraint is fortunately not absolute, and hence at one time RBZ was able to operate foreign currency auctions, and about a year ago introduced a Drought Mitigation and Economic Stabilisation Fund, succeeded more recently with a Overnight Investment Window, both of which facilities enabled RBZ to supplement the inadequate exchange rates with abnormally great interest rates.

As commendable as the intents of these measures were, they could only have some limited palliative effect, rather than to heal the intensely counterproductive repercussions of the government determined, specious exchange rates.

Now Gono and his team have resorted to a far more substantive measure to counter the ill-effects of government’s exchange rate policies.

It is far from a total resolution, for constraints continue to prevail. Effectively, for the last four years the governor has had his hands handcuffed, been thrown in the deep end, and expected to survive.

The handcuffs still prevent him from swimming freestyle, and distances, but in his latest MPS he found a way to tread water, and even swim a length or two.

In order to restore viability to exporters, and thereby ensure enhanced foreign currency generation, Gono announced two significant, interrelated foreign exchange market reforms.

The first is designed to avail exporters of viability-related exchange rates.

With immediate effect, RBZ introduced a “willing-buyer, willing-seller, priority-focused twinning arrangement in the foreign exchange market”, whereby authorised dealers (banks and like licensed institutions), will match sellers and buyers of foreign exchange, guided by a pre-determined priority list set from time to time by RBZ (initially comprising utilisation of the foreign exchange transacted for the importation of food and food production requisites, fuel and electricity, non-food industrial inputs, public and commercial transportation, school fees, business travel, professional fees, medical related goods, and diverse other specified items).

Exchange rates determined by the willing-buyer, willing-seller transactions within the interbank market will be applied to the purchase by RBZ of mandatorily surrendered foreign exchange.

Moreover, trading within the interbank market on the willing-buyer, willing-seller basis applies now not only to sales of foreign exchange (in excess of mandatory surrenders) by exporters, but also to NGOs, embassies, international organisations, Zimbabweans in the Diaspora, and other foreign currency holders.

Reinforcing the considerable benefit of sellers obtaining somewhat more realistic exchange rates than heretofore (notwithstanding that such rates may not wholly recognise the real value of foreign exchange), the governor also announced that the heretofore mandatory surrender by exporters of 35% of export proceeds to RBZ will be subject to reduction to performance-linked surrender thresholds.

Exporters who manage to enhance their export performance will be entitled to retain a greater portion of their forex earnings to fund their operations, provided that they utilise their foreign currency retentions within 21 days of receipt.

A 10% increase in exports over March 2008 levels will lower the mandatory surrender to 25% of forex earnings, and for each further 5%, of export growth, the surrender level falls by five percentage points, up to a 30% increase in exports, which lowers the surrender levels to 5%, and if the export incremental exceeds 35% of March, 2008 levels, the mandatory surrender will be as low as 2,5%.

Not only will these new foreign exchange policies restore viability to most exporter operations, and thereby yield greater usage of productive capacity but, in addition, the greater foreign exchange earnings, and the enhanced retention thereof by the exporters, should considerably reduce volumes of unlawful trading in the foreign currency parallel and black markets.

As a result, although there will be significant continuing trafficking in those markets, the months ahead should witness progressively increased exchange rates therein.

This increased productivity should result in some substantive containment of the gargantuan hyperinflation plaguing Zimbabwe.

Inevitably, however, those positive developments will only materialise over a period of time, as there is an unavoidable lead time until the enhanced exports materialise.

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