Sustaining rates convergence a mammoth task, economists

ECONOMIC analysts say convergence of the exchange rate will be difficult to sustain going forward if the interbank does not function as a real market where banks sell foreign currency to individuals.

At present, banks are not willing to sell foreign currency to individuals.

Recently, President Mnangagwa announced a raft of measures meant to halt the devaluation of local currency, among them promoting the willing-buyer-willing seller policy.

Announcing the measures the President said expectation was that the rates would converge “over time.”

Following the easing of controls on the exchange rate, the local currency was as of yesterday officially trading at $290,88 per US dollar while the interbank rate was at $296,68.

In an interview, economic analyst Professor Gift Mugano said while the movement of rate was showing convergence in the past few weeks, the rates were still far from the parallel market rate that was presently ranging between $420 and $450.

“The ideal situation is to have convergence of the rates or to have very minimal margins between the parallel market rate and the official rate.

“We are seeing movement on the official exchange rate regarding auction and the interbank. If we have convergence, no one would want to go to the parallel market but the question now is it going to happen?

“My major concern which I hope the Government will take is that the interbank as it stands is not functioning as a real market.

“It must be a market where one comes in and sell US$ and when I want US$, I should also be able to walk in and buy US$ as an individual but if it is a one way, where I just sell and can't buy even if the rates are converging, that market will never be able to kill the black market,” he said.

Prof Mugano said this was because the black market will remain an alternative market which functions as a proper market.

In this context, he said the Government should give more prominence to bureaux de change as well as banks.

“For me that is the case, but you see the current debate focusing on movement of the rate rather than mechanics of the market itself,” he said.

A financial market analyst, George Nhepera, echoed similar sentiments adding that the exchange rate stability is most likely to elude the monetary authorities going forward.

“Stability is most likely to be elusive for the government. This is because the rates are being influenced by non-economic factors. Such as political risk, election campaign, greed and corruption.

“One way to contain the situation is a commitment to a stakeholder-approach to policy formulation that is genuinely inclusive of both government and private sector.

“It's about time for the Government to listen with empathy to the issues of concern as raised by the private sector and citizens at large,” he said.

Reserve Bank of Zimbabwe ( RBZ) Governor, Dr John Mangudya, said the measures announced by the President will stabilise the economy as the auction exchange rate would now navigate towards the willing buyer-willing seller.

He said this will promote a unification between willing buyer-willing seller and auction rate so that there is no arbitrage.

“If you come at auction at 125 or 170 when the willing buyer is at 300 it means that you have got arbitrage, so the purpose of convergence of the rates is to minimise arbitrage and ensure that we reach equilibrium in the foreign exchange market.

“If you look at the auction numbers in terms of the exchange rate and the willing buyer-willing seller, the figures are almost similar now. If you look at the rate that was there yesterday (Tuesday) it was between $280 and $330 at the auction and the willing buyer-willing seller it was between $284 and $304 so it means there is now convergence or we are moving towards converge, so it's working,” said Dr Mangudya.

The RBZ boss reiterated that inflation in Zimbabwe was behavioural inflation.

“The pass through effect of the parallel exchange rate is passing into the price of goods and services and therefore increasing inflation, which is behavioural inflation. And where is that behaviour coming from? “We have said it's coming from the past experiences of hyperinflation and past experiences of dollarisation and added to that its delinquent behaviour by certain persons or entities within our economy.

“So that combination, it becomes behavioural, so it requires that we enhance confidence in the economy and at the same time that we deal with market failure, we deal with market indiscipline and that at the same time we need to continue less of bad news in Zimbabwe because some of it is caused by bad news.”

Renowned economic analyst Eddie Cross concurred with Dr Mangudya, adding that for sustainability of convergence of the exchange rate, it is critical for the monetary authorities to bring more foreign currency into the market.