Govt In Desperate Bids To Contain Exchange Rate
19 October 2019
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Bond notes and USD

HARARE – The government will pull a few tricks up its sleeves soon to stabilise the exchange rate as part of a broader task of creating a viable environment for business, Business Times reported.

A team of President Emmerson Mnangagwa’s close advisers in the central bank and in government, particularly the Ministry of Finance, see the stabilisation of the exchange rate as a step in the right direction that has to be made to stop economic haemorrhage characterised by deindustrialisation.

The stabilisation of the exchange rate is also seen as critical ahead of the introduction of a local currency. Informed sources said authorities are currently making frantic efforts to work on improving confidence in the financial services sector, enhance productivity, manage the supply of money and increase the supply of foreign exchange.

In terms of exchange rate stabilisation, there are two choices for a government, normally through its central bank. It either takes an adaptive or active approach. In the adaptive approach, there is no active participation, but instead adapting to the market tendencies. In the active approach, the central bank actively influences the exchange rate.

Sources actively involved in the critical task of exchange rate stabilisation say the current exchange rate volatility makes it difficult for business to plan and is a huge threat in the case of restocking.

This creates problems for the formal and informal sectors and makes it difficult to run bureaux de change. The sources said a stable exchange rate is good for foreign currency dealers and makes foreign currency more available.

“When the rate is volatile, people make losses when they need to restock. This is the same for bureuax de change where the cash is the stock and
when they need to replenish the stock they are at a huge loss,” said a close source.”This is why they don’t sell the US dollars but they are just buying from the public.

This is a problem because if you want to travel you just go to a bureau de change like in most countries. You buy your money and or sell as you please. We can’t have people going to Zambia for a night failing to get US$300, it’s unacceptable.”

Efforts to stabilise the exchange rate include the ongoing anti-corruption fight which has in recent weeks seen the central bank freezing accounts belonging to individuals and corporates believed to be driving the black market.

The central bank also temporarily banned the cash-in, cash-out, and cash-back transactions on EcoCash as part of the measures to control the volatile exchange rate. EcoCash agent lines were being used by illegal foreign currency dealers and who were driving the rates up.

The parallel market rates crashed significantly when EcoCash agent lines were closed. “There is information on everyone and indeed there are no sacred cows,” one source told Business Times. “You will be surprised when the appropriate action is taken. It’s not about making noise, but getting things done to stop malpractices and stabilise our rates. It is known who is doing what on the parallel market because people are sending monies where they are not supposed to go, where there is no production. Instead, money is a commodity.”

As foreign currency shortages persist despite the creation of an inter-bank market, which is meant to be a free market place for foreign currency trade, the parallel market is thriving. Bank officials, according to information at hand, have now started charging premiums on the inter-bank rate to give their clients foreign currency.

Economist Prosper Chitambara said a stable exchange rate helps to stabilise prices because developments in the forex market are a key determinant of inflation. “This will generally result in a stable macro economy,” Chitambara said. He said the best way for the government to stabilise the exchange rate was to push production up by attracting new investment and enabling existing businesses to grow and export their products.

“When there is a greater supply of forex, there tends to be stability, but right now the demand for forex remains high while supply declines,” Chitambara said.

Economist Brains Muchemwa blamed the exchange rate depreciation and the subsequent pricing instability on the government printing huge amounts of unproductive money.

“The government is the biggest culprit in terms of destabilising the exchange rate,” Muchemwa claimed. “The only way to stabilise the exchange rate is for the government to limit broad money supply growth.”