Throwing money at the backlog will not eradicate the artificially high demand. If anything, it will exacerbate it

By Paison Tazvivinga

The new dispensation, through monetary and fiscal authorities, is pursuing multiple objectives chief among them employment creation, stable prices, a stable foreign exchange rate and moderate long-term interest rates. Of late the main emphasis has been on inflation reduction and foreign exchange stability.

The proof thereof lies in the continued decline in annual inflation which stood at 837.5 percent in July 2020, 106.6 in June 2021 and 50.2 percent in August 2021 and a relatively stable foreign exchange rate hovering around ZWL86 to USD1.

To tame inflation, authorities have been pursuing a tight monetary policy to regulate money supply through maintaining the reserve target at 20 percent according to the recent Monetary Policy Committee resolutions of 27 August 2021.

The bank policy rate at 40 percent per annum has also contributed to the inflation curbing endeavour.

In a bid to regularise foreign currency availability and distribution, a Dutch auction system was introduced on 23rd June 2020. The auction system enjoyed much success during its infancy as it improved foreign currency availability at formal rates.

 

 

However, the success seems to be dwindling mainly because of the persistent widening gap between the formal and informal market rates. The latest foreign currency auction results as of 31 August 2021 stood at ZWL86.0551 to USD1 however the informal market rate has accelerated to almost double that of the formal market.

This has seen most people lose confidence in the sustainability of the auction system.

Its effect has also been limited in so far as transitioning into the reduction of goods and services in the retail sector is concerned, for example, fuel dealers have been allocated foreign currency every week but they sell fuel in US dollars at a price that is not reflective of the formal foreign exchange rate.

Besides the disparity between formal and informal rates, the foreign currency auction market has also been criticised based on the criteria used for companies to participate at the auction system.

The procedures seem to segregate especially to SMEs.

The disbursement of the funds too has been lagging which is another cause of concern.

It is however, refreshing to note that Zimbabwe is one of the countries that was allocated part of the Special Drawing Rights (SDR) by IMF to the tune of USD961 million. The SDR of almost US$1BN could not have come at an opportune time than this.

 

 

How the SDR funds are spent is crucial else we risk missing another opportunity to drive towards the envisaged growth levels. The Minister of Finance said the funds will be focused on areas that support robust economic recovery.

To this end, the Minister identified mining, agriculture, and local currency support among other areas of focus.

In supporting our local currency, the Minister noted that we will continue to build our international foreign currency reserves to support the domestic currency which has performed so valiantly thus far.

The ministers plan seems good and commendable however, the only concern is the deafening silence regarding how exactly the auction is to be supported.

Hopefully it will not be a case of just throwing money at the gaping hole. The way it is to be done is of much importance as it can either turn the country’s fortunes for the better sustainably or result in the whole SDR allocation being yet another sad chapter.

The nation really needs a roadmap to normalisation of the economy.

As alluded earlier, the foreign currency auction system suffers from two technical gaps notably: The gap between the official and informal market rate; and the shortfall between supply and demand, which is the lag in allocation.

Both challenges need to be addressed and their root causes are interlinked. For example, suppressing the forex rate results in exponential increase in demand and in our case the increased demand has been ‘solved’ through creating a backlog.

Throwing money at the backlog will not eradicate the artificially high demand. If anything, it will exacerbate it.

 

 

Currently, applicants are factoring in a 2-month delay when they bid, which lowers the volume. If the auction starts paying in two or less weeks then bidders will be willing to commit more funds to harvest more of the windfall.

A more sustainable solution will be to let the formal forex rate go to the market, lets allow market forces to work and the rate to depreciate as a reflection of fundamentals, it will settle in the medium to long term. We then support such a move by introducing transparent policies to drive production and most importantly exports so that we increase forex reserves.

To the nation at large, we must remember that we do have several deep and wide challenges apart from the auction, among them, white farmers’ compensation, of which we are still waiting for a key policy document on how it will be addressed holistically.

Therefore, we better not be too expectant, we will rather be prudent and view the SDR as just but a bucketful of water against a raging fire.

Paison Tazvivinga is a Development Economist and can be reached on ptazvy@gmail.com

 

 

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