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Emergence of policy consistency

THE second half of the year is emerging with strong positive indicators from policy formulation and implementation perspectives.Historically it was customary behaviour for authorities to issue and reverse policies and sometimes adopt conflicting positions. This, combined with a weak productive sector, had further entrenched negative expectations that promoted speculative and rent seeking behaviours.

Misheck Ugaro

In the last two months of June and July, policy steps have emerged which warrant a change in the thinking of market agents.

Due to past experiences stretching back to the early 2000s when the local currency was eventually demonetised due to misplaced policies, it will take long for the market to eventually grow confidence.

However, it is imperative that we begin to highlight some positives that the country has experienced in the last few months and those likely to continue into the future

Introduction of forex auction system

Authorities responded positively to various representations from economists, industry, and various other sectors against the pegged exchange rate system where the rate was at ZW$25:1US$ by introducing an auction system.

While economists had called for a complete liberalization of the market, industry had recommended a crawling peg system on the face of a galloping parallel market exchange rate that peaked at ZW$105:US$1.

Inflation peaked at 786% as economic agents based prices on expected further depreciation of the local currency. The market had resigned to an eventuality of the local currency running into extinction, further pressuring demand for the US dollar as a store of value.

The authorities adopted the Dutch auction system for trading amid mixed feedback from the market. A few were optimistic for its success while others had negative expectations given prior historical experiences since 2004.

Some players showed signs of resistance to the system and kept on pricing goods at the parallel rate during the first few weeks. The expectation was that the system was unsustainable.

However, to date the auction system has performed satisfactorily and has become an efficient price discovery mechanism as intended.

The authorities must be applauded for constantly improving the quality of information released after each auction.

At the beginning some important data, such as the number of applications received, the number of applications rejected, and the reasons for rejections, was not published. As the system developed such information was added. This eliminated doubts as the system became more transparent.

At inception, the highest bid price was 100 and it has gradually fallen over subsequent auctions. It settled around 85 for the last two auctions. That rate has almost converged with the parallel rate which is down at 90 from above 105 at the start, showing a differential of 5.

What is more important to note are the two narrowing gaps. The first being the difference between the highest and lowest bid rates. At the beginning it was at 75 and has narrowed to 10 by the last auction. The second differential is between the parallel rate and the effective auction rate, (the parallel market premium). This has narrowed from 48 at the first auction to 5.

The performance of the auction system and the apparent convergence is discernable. The result has already started filtering through by means of a decline on the inflation rate to 736% in June.

The downside though is a discernable lingering sense of doubt amongst some economic agents and economists regarding the sustainability of the system. The doubt arises from sustainability of supply of foreign currency into the system. As at the end of July, total deposits in the FCA accounts amounted to US$1,2 billion and the market started experiencing a supply by exporters onto the auction.

At the 5th auction an amount of US$2,5 million was supplied by exporters’ liquidations. In addition, the authorities have already demonstrated the ability to fund as shown by high allocation of above 90% for each auction utilising credit lines as well as own sources from export retentions proving a steady supply.
Continued doubts, however, still exist mainly in the retail sector where pricing remains at the parallel rate. This is evidenced through a reluctance to display dual prices on the shelves allowing consumers to make informed choices on the currency of purchase.

This rather unfortunate behaviour forced the authorities into issuing a regulatory statutory instrument SI 185 of 24 July 2020 and a press statement. It should not have come to that stage as players are expected to play transparently and responsibly for the benefit of all.

On the authorities’ part, the removal of the peg and the adoption of the auction system is a plausible first step towards a transparent price discovery system. It deserves support to enable trades to start being done more frequently on a daily basis by authorised dealers, eventually leading to completely open bilateral trades. The starting point as established is a good departure point given where the country is coming from.

Additional achievements during the period include:

l The conclusion and signing with farmers of the Global Compensation Deed for improvements on the farms compulsorily acquired during the resettlement under the land reform programme. This has also faced criticism mainly arising from a lack of understanding of the nature of the agreement regarding the purpose, the source and timing of payments. This is a significant fulfillment of a constitutional provision and it settles a long outstanding matter that had detracted on the efforts to correct the economy. This should bring some unit of purpose going forward;

l The recently announced midterm budget statement had some telling positives including a nominal surplus of ZW$800 million. This too should be looked at in terms of its implications to the country’s debt position.

Zimbabwe is not in a position to raise foreign lines of funding to efficiently sustain a budget deficit. It implies that the country has to live within its means and has for once managed since 2011. The implications of the surplus, while nominal as it is not yet felt by the man on the street in the form of good health services, good infrastructure, and disposable incomes, it has to be viewed in terms of its long term implications as government does not have to borrow.

A cumulative surplus will ultimately begin to filter through to all members of society. Given the current challenges arising from the global Covid-19 pandemic, running a deficit would be towards unproductive consumptive purposes instead of capital projects.

The government has for once decided on the correct route by funding all emergency pandemic requirements from the limited available resources. It also has the added advantage of supporting the stabilisation of the exchange rate by avoiding the risk of transmitting a budget deficit into increased money supply and dislocate the positives now being experienced on price stability. The authorities have attempted a fair balance on priorities.

The country has been used to failure of policy leading to mistrust and thus always looks at new policies with suspicion. The author has been to date in that category too but it is acknowledged that stability is now beginning to be visible. It is important for all players to adopt a positive attitude towards these measures and the country is likely to end the year close to the projections indicated in the Mid Term Budget Statement.

Misheck Ugaro is a former expatriate banker based in several Sadc countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society. Email- misheckugaro@hotmail.com. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society . — kadenge.zes@gmail.com or mobile +263 772 382 852.

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