Liberalising the exchange rate is important

Why floating the exchange rate could be the solution to Zimbabwean economy

By Elvis Dzvene

A floating exchange rate regime entails liberalisation of the financial sector by removing all government interventions in the financial sector, whereby the value of a currency will be determined by the market forces based on supply and demand of our currency on the international currency market. This is in contrast to a fixed exchange rate, in which the government predominantly determines the rate. Leading economies of Africa South Africa and Nigeria have abandoned fixed exchange rate approach – South Africa in 2000 and Nigeria in 2016 – and replaced it with floating exchange rates.

In the case of Zimbabwe if it moves from a command economy to free market economy, it means that the currency in use, the bond note value, will actually be affected, because the value of bond notes hinges on the level of productivity.

At the moment, if we are to look at the levels of production in Zimbabwe they are very low. Not many companies are operating at full capacity, most businesses are not doing well. So if we liberalise today you find that the value of our currency that is the bond notes versus the dollar and Rand will be very low.

To businesses it brings positive results. It is good for business as compared to what is currently happening in Zimbabwe. If we are to look at the Delta Beverages, fuel agents, cooking oil manufactures and pharmacies to mention a few, they want to price their products in US dollars. But the government intervened and said no. Their point is that they wanted to come up with prices that are economic to their businesses.

So if we liberalise we allow businesses to operate the way they feel. We might find most businesses actually reopening and operate at or close to full capacity because they will be charging prices that will actually cover their cost. The business sector is saying that because of investment they did during the government of national unity they could not actually safeguard that investment using the current government controlled prices. So if the government liberalises or move to free market economy, businesses will actually thrive.

There is also the issue of sourcing raw materials abroad. By liberalising the economy, businesses will be able to do what they are failing to do now – issues to do with investments where businesses will re-tool capital acquisition as well as foreign direct investment. No one wants to invest in an economy that is actually being directed in everything by government. So if we move to a free market economy, businesses will actually benefit from investments from abroad.

Freeing up the financial system is the engine for growth. Financial institutions like banks will be able to source currency locally and abroad. That finance will actually be used to fund local investments. If we are able to source funds from abroad it also means the availability of these funds will make the financial sector able to actually give out loans at concessional rates that are good for businesses.

However, moving to a free market economy at the moment it will not perform very well on the currency market because of lack of production but in terms of businesses it is better as compared to what we have now.

On black market issues, I think if we liberalise today we might actually weep out the black market because the black market is actually thriving on the imbalance or imperfections in the market where the official position is 1:1 but what is on the ground is different. That gives free play to the black market. It gives the black market the opportunity to leverage on that. But if we move away from the current situation where the government is saying 1:1 we will move on to the actual exchange rate determined by the market forces. I think we will be able to solve this problem of the black market and then move to a position where the bond note will be trading at a particular rate to the US dollar. The black market will be taken out of the equation.

The Balance of Payment (BOP) is a bit tricky again. If we liberalise, we use the bond note as our currency. By liberalising, it means that we are setting our bond notes against trading partners’ currencies and because of issues to do with our low levels of production our currency is likely to be weak. So in terms of BOP deficit with a weak currency we are likely to actually sell more abroad because our products are cheaper in their eyes because we have a weak currency and their products are more expensive to Zimbabwean market.

However, if we are to be practical with the correction of a BOP deficit, even with a weak currency Zimbabweans still import from trading partners like South Africa. The question is do we have products at home so that people can switch to locally produced goods? So at the moment I can say that free market movement on its own would actually solve balance of payments problems. What is needed going forward with the liberisation of the financial sector is to correct the problem of productivity. Without a functional industry and sound investment strategies, Zimbabwe will still fall in the same traps.




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