EDITORIAL COMMENT: Monetary reforms move towards normal economy TWENTY one public entities, mostly enterprises where the State is just an investor rather than a manager, including the Reserve Bank of Zimbabwe and its subsidiaries, have been exempted from the requirements of the Public Procurement and Disposal of Public Assets Act.

The raft of radical reforms by the Ministry of Finance and Economic Development now backed by the Reserve Bank of Zimbabwe over the past few weeks to create and maintain substantial stability in exchange rates and so prices reach their next step today with the interbank market taking over the burden of import funding from the foreign currency auctions.

However, the auctions remain a vital component of the new upgraded systems, but are now a totally open-market pure Dutch auction that does the price discovery, in other words uses pure market mechanisms to set the exchange rate, with the banking system doing the actual work of mobilising export earnings to fund imports, but using the auction pricing.

The other parts of the recent package of reform see other sources of foreign currency, with most Zimbabwean businesses now expected to earn at least a reasonable fraction of their own foreign currency. 

With around 70 percent of local transactions already in US dollars, most businesses receive significant fractions of their earnings in foreign currency, and they are expected to use this.

The Finance Ministry shoved up their retention percentage to 100 percent, that is the local business keeps every US dollar that comes in over their tills or into their bank accounts when they sell goods and services locally. 

Obviously many companies will still need to add to that pool, but now they need to talk to their bank.

The auctions were introduced at the end of June three years ago in 2020. They did their initial function of bringing a reasonable level of stability in exchange rates. 

But the ability of some to manipulate and speculate within the auction system helped to create the cycles of stability interspersed with an annual inflation spiral triggered by people messing around within the black market.

The latest sets of measures by the fiscal authorities, that is the Finance Ministry, and the monetary authorities, that is the Reserve Bank and its Monetary Policy Committee, is clearly designed to end that set of cycles with once a reasonable degree of stability is obtained seeing the Zimbabwean exchange rates simply following fundamentals.

The problem in Zimbabwe has not been dramatic indiscipline or money printing under the Second Republic. The fundamentals have been sound, with the Government very close to a pure balanced budget and only borrowing on capital account where there is a defined revenue source to service that borrowing. This is more than most countries do.

At the same time investment and other reforms have seen foreign currency inflows exceed foreign currency outflows, in other words in total Zimbabwe earns more foreign currency than it spends. 

That should mean a very smooth economy, but unfortunately there are always some who, as Finance Minister Mthuli Ncube has noted, who seek loopholes so that they can reap where they did not sow and create wealth by speculation rather than production.

In most of the world, including almost all major global and regional economies, the complex arrangements arising from Zimbabwe’s use of dual currencies simply do not exist. 

Export earnings flow into the banking system, importers apply to their bankers when they want to tap that money. 

Exchange rates are set within the interbank market by willing buyers and willing sellers. Since the end of fixed exchange rates some decades ago, exchange rates now move gradually up and down, based on fundamentals such as money supply, the balance of payments and the balance of trade, but unless a Government is totally irresponsible there are no sudden lurches.

Already a degree of stability is now starting to be seen in pricing. As with past reforms the authorities have had space to operate within the mess caused by the black market currency speculators, and a lot of what is now happening with official rates is reducing the dramatic premiums that arose in the past three or so months.

Many suppliers, manufacturers and even retailers have already taken into account the black market exchange rates, which are now moving very slowly, so that the authorities have been able to introduce their reforms without adding to the burden of consumers.

Those who talk about “the parallel rate” also need to understand there is no such thing, and no formal mechanism for establishing any single rate. 

Rather there are groups of dealers who hold a wet finger to the wind and offer to buy or sell US dollars for that they think they can get away with. 

Those who are able to shop around can find surprisingly large differences in prices of foreign currency, depending on who they are dealing with, how much and in what form they are paying, and the sums involved. 

The gap between what any one dealer will pay for a US dollar and what they sell that dollar for an hour later can also be dramatic: we need to think vendor mentality rather than bank manager.

We still face a period of adjustment, but the Finance Ministry reforms and now the Reserve Bank reforms are at least clear, and both sets are working with sound fundamentals to make long-term stability an option, with speculation and messing around becoming ever more difficult.

Systems are being created that will make it ever more difficult for those who profit from cycles of instability to make those profits, and hopefully they will move away their speculation and destructive practices and start trying to make money honestly by producing more goods and services of better quality at fair prices, which is the only sure way anyone can use to become rich.

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