Coercive measures won’t help rein in galloping exchange rate

THE failure by the President Emmerson Mnangagwa’s administration to bring the galloping exchange rate under control despite introducing a cocktail of measures to do so has shown the futility of trying to arm-twist market forces.

A confidence deficit still prevails as far as the local currency is concerned.

In recent months, the exchange rate has spiralled out of control with the widening disparity between the official exchange rate, which stands at US$1:ZW$90 and the parallel market rate which has breached the US$1:ZW$180 mark.

The widening disparity has spawned a massive increase in the price of basic commodities further eroding disposable incomes as inflation and the cost of living have shot up.

The lack of confidence in the local currency comes after the country has suffered two bouts of hyperinflation in a space of 11 years that have wiped out incomes and pensions.

Alarmed by the development, the government has sprung into action publicly exposing more than 70 individuals for illegal forex activities and money laundering with the threat to arrest retailers and players in other sectors of the business community for foreign currency violations.

The crackdown, however, is one of numerous measures the government has taken to contain the currency chaos, in vain.

Recently, the Reserve Bank of Zimbabwe (RBZ) exposed “outliers”, including listed milling giant, National Foods, which it said were “abusing” foreign currency acquired through the foreign currency auction system set up in June last year to provide cheap forex funding to companies.

The apex bank pointed out they had fined some of the companies for the violation.

The auction market has hit turbulence after it had initially provided relative stability with the central bank delaying to fund foreign exchange allotments for up to nine weeks. This has left companies in limbo and has had an adverse impact on companies’ operations.

The government in May this year promulgated Statutory Instrument (SI) 127, which prohibits business operators from charging above the official exchange rate and empowers authorities to punish those that refuse to accept the Zimbabwean dollar for local transactions.

However, the central bank, retreated with Mangudya saying that SI 127 would now be limited to those who wantonly abuse the foreign exchange auction system, manipulate the exchange rate and do not comply with anti-money laundering regulations after a huge outcry by business and after the SI triggered a fresh wave of price increases.

The government last year abruptly suspended trading on the Zimbabwe Stock Exchange for more than a month on allegations of alleged illicit activities as well as halting the fungibility of three counters, namely Old Mutual, Seed Co and PPC.

The move by the government resulted in massive losses as well as flight of investors from the local bourse.

In 2018, Mnangagwa, effected a new law which would result in money-changers being jailed for up to 10 years with the confiscation of ill-gotten wealth.

However, three years later the number of money-changers has, if anything, increased in number as desperate Zimbabweans look to exchange the reviled local currency for the greenback because of its store-of-value use.

Unless the government puts in place concrete currency measures to instil confidence in the market, it will continue to go round in circles, according to economist and CEO Africa Roundtable chairperson Oswell Binha.

“The first thing that should be noted is that markets take positions and Zimbabwe has serious legacy issues,” Binha said. “As far as I am concerned, the government needs to deal with two major components which are trust and confidence. Unless the government deals with these components, no amount of legislation or coercion will work.”

Binha said the government would need to make bold decisions which include reversing some of its policies and “swallow their pride” in engaging stakeholders over implementing measures that would curb the currency volatility on the matter.

He added that with the market having rejected the local currency, consideration should be given by the government to dollarise the economy to bring about stability, which has so far proved elusive.

The Confederation of Zimbabwe Industries (CZI) this week called for urgent action to end the currency chaos.

“The Zimbawean dollar is now in real peril and urgent and well considered policy measures must be implemented by the authorities aimed at bringing back confidence into the currency markets,” CZI said in an update to its members.

“In truth, we find ourselves in a situation that could and should have been avoided had appropriate policy prescriptions been in place. We are, of course, concerned about the response by the authorities so far, which was to blame players in the foreign currency markets.”

The CZI warned clamping down on informal foreign exchange trading in the absence of a viable formal market will have “catastrophic consequences for the economy”.

The RBZ this week met with bankers, retailers and manufacturers to deliberate on finding solutions to rein in the exchange rate which has run amok. It remains to be seen if this will help end the currency chaos.

However, business consultant Simon Kayereka is not convinced that it will effectively contribute to providing the solution to the crisis.

“What is interesting is that the meeting was attended by business and government and the consumers who bear the brunt of these shenanigans were not represented,” Kayereka said.

“As long as the RBZ and banks continue to be irresponsible, this challenge will not go away. The government must also stop managing the exchange rate. Plugging the leak from the banks will help to narrow down the two rates.”