Zimbabwe: Forex, Price Stability Need Private Sector Buy-in

13 August 2020
editorial

Zimbabwe is on course to achieving two important fundamentals for economic growth, price stability and foreign exchange stability, but it is time the private sector comes to the party.

These efforts are anchored on the foreign exchange auction system, which started operating almost two months ago.

Naturally, such efforts as the foreign exchange auction system must lead to exchange rate and price stability, but as we have seen from the market, it will take more than the Reserve Bank of Zimbabwe and Treasury for the country to achieve exchange rate stability.

For that to happen, the private sector will also have to play its part.

The trend we have seen on the foreign currency auction system should be good enough to convince even the doubting Thomases that we now have a system that works.

What the authorities have done is to give the fundamental base on which to build confidence, the basis to achieve price and foreign exchange stability.

This is an opportunity that we cannot afford to miss as the consequences will be dire for the whole economy. The Bankers Association of Zimbabwe, as well as the Confederation of Zimbabwe Industries, have already shown their full support to the new system.

We await the voices of other players: the Chamber of Mines of Zimbabwe, the Zimbabwe National Chamber of Commerce, the Retailers Association of Zimbabwe, among others.

If we all rally behind the auction system and get 80 percent of economic players to participate as buyers or sellers, then we will have the full market-determined exchange rate that we have been calling for.

We are close to a point where sellers are happy to sell and buyers are happy to pay.

A very key role for central banks across the globe is to conduct monetary policy in a manner that achieves price and exchange rate stability. Price stability is important because if it is not there, the economy cannot function in a sustainable and solid way.

Price stability is a key element in decision making by both governments and the private sector, according to the president of the European Central Bank and former IMF boss, Christine Lagarde.

Without price stability, both firms and individuals will not look for investment opportunities, but will look for hedging and even speculative opportunities.

Very few can make a decision to invest, expand, or even save when the environment is inflationary.

When prices are unstable, the business strategy becomes value preservation instead of growth. Investment options are narrowed towards liquid assets such as foreign currency and shares, and Zimbabwe has witnessed this phenomenon before. The ultimate result is the subdued economic activity.

Consumers are hard-pressed to spend, while business and Government will find resources inadequate for long term investment and expansion projects.

Therefore, price stability, which itself includes multiple factors, has to be the focus area for central banks, including the RBZ.

But the central bank cannot go it alone. Treasury and the private sector will also have to play a key role. Treasury has shown it can do this through fiscal discipline, where it has successfully resisted the temptation to spend beyond its capacity to generate revenue. Zimbabwe must simply live within its means.

If circumstances dictate that more should be spent, for example, because of natural disasters such as droughts, cyclones, or a pandemic such as Covid-19, then Treasury would be best advised to borrow. It must resist the printing machine.

If circumstances do not permit borrowing, as in our case due to sanctions and debt arrears, then Treasury must prioritise the little that is there. It must never be tempted to print, as the results would be dire.

For years in the old dispensation, the Government was on that path of printing and not backed by increased production or economic activity. It printed physical notes prior to 2009 and the result was hyperinflation and the collapse of the Zimbabwe dollar. Post-2009, the printing was in the form of electronic money, and again the result has been the same: runaway inflation and a near currency collapse.

Fortunately, during the new dispensation, Finance, and Economic Development Minister Prof Mthuli Ncube has now put an end to printing money, even resisting the temptation to table a supplementary budget for the 2020 National Budget.

Instead, he made a pledge: "The Government will exercise fiscal restraint including non-recourse to RBZ financing and non-expenditure outside the Budget."

Under Prof Ncube, Treasury has actually recorded a surplus in the last two years, laying a good footing for economic growth.

On its part, the central bank has also made similar commitments. The bank has adopted a monetary targeting framework, with the base money as an operational target of monetary policy. Under this framework, the bank targets reserve money growth of between nine percent and 10 percent. So far, reserve money growth has been under control, nothing alarming. The bank expects that the limited growth in base money will eventually pin down inflation, particularly after the dissipation of the lagging effects of past high money-supply growth, and as adverse inflation expectations are dampened by improved confidence.

With the support of all stakeholders, and if all these proposals continue to be implemented like what is already being done, the expectation is that within the next few weeks, there will be total stability in the important economic fundamentals of price stability and foreign currency stability.

The momentum on the foreign exchange auction system should be maintained and supported by all sectors.

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