RECENTLY the Reserve Bank of Zimbabwe made some notable policy changes as far as the exchange rate determination is concerned.
For almost a decade, the Zimbabwean economy has been operating under various fixed exchange rate regimes.
The recent changes suggest that the authorities might have realised the negative effects of fixed exchange rates, hence a shift to a market-oriented determination of the exchange rate. Basically, the RBZ has floated the Zimbabwean dollar.
Whether it will entirely eliminate the parallel market, remains to be seen. One thing to note though is that there is still a huge appetite for foreign currency, which is not necessarily addressed by the RBZ priority list, and consequently that unsatisfied demand may still provide a platform for a parallel market.
What for instance will happen to people that require foreign currency to pay for the pay-per-view TV subscriptions?
Given the demand for foreign currency in the market it is highly unlikely that those who apply for funds to go for holidays or shopping trips will be considered.
In evaluating the exchange rate policy shift, it is perhaps prudent to analyse the rationale often advanced by multilateral agencies such as the IMF and others, when advocating market-based exchange rate systems.
Zimbabwe is a developing country and such a policy can have a positive impact on our balance of payments position.
The logic is that by floating the exchange rate, you create a mechanism through which a current account balance of payments position in disequilibrium will eventually be restored to equilibrium.
A balance of payments deficit caused by a decrease in the demand for Zimbabwean exports, will lead to a shortage of foreign currency. The fall in the value of the Zimbabwean dollar causes the price of Zimbabwean exports to decrease in hard currency terms and the price of foreign imports to increase in Zimbabwe dollar terms.
Consequently, the demand for Zimbabwean exports increases and the demand for imported goods decreases.
The deficit shrinks and the balance of payments returns to equilibrium. All things being equal, this in turn will help domestic industry to compete freely and can translate into increased production (assuming of course that price controls are lifted).
Thus, the Zimbabwean government and the RBZ need not worry about having to manage their balance of payments
situation. If they allow the exchange rate to fluctuate freely any disequilibrium will automatically be restored to equilibrium. The attention of government can then be focused on achieving other broad objectives such as inflation reduction, employment creation, economic growth and poverty reduction.
Given that the Zimbabwean economy has been influenced to a large extent by the parallel market for too long, the recent policy changes will likely benefit the economy in allocating the scarce resource efficiently.
Zimbabweans in the Diaspora can now eliminate the risk of sending money through bogus money transfer agencies.
There are also potential negatives associated with the recent policy shift. Firstly, the relaxation of the exchange rate controls, besides shocking the economy, may increase inflationary pressures. Although a depreciating currency will help our country’s exporting sector, the cost of imports will invariably rise, also leading to cost push inflationary pressures. Those people and companies whose livelihoods or operations rely on the consumption of goods with high import content will experience difficulties.
For companies with external liabilities denominated in foreign currencies, the exchange rate depreciation will have a negative effect on their balance sheets as they will experience both economic and transaction exposure. The associated reduction in net worth for the affected companies will result in an increase in the risk premium on borrowing.
All in all the central bank must be commended for the bold move to float the exchange rate. However, unless this is complemented by other reforms such as addressing budget deficits, limiting usage of seigniorage which results in unsustainable currency emissions as reflected by the growth of money supply, and elimination of the disastrous policy of price controls, then the benefits of the reforms may not be felt.
In addition, as Zimbabweans we must accept that our efforts will have to be complemented by an injection of foreign exchange somewhere, for this economy to be kick-started onto a recovery path.
Anything short of that, the economy will simply experience continued depreciation in foreign exchange rates. For at the heart of our economic challenges lies the supply issues, even of foreign currency, which need to be addressed.