[2008-06-23]  Take Measures to Normalise Exchange Rates
The switch from a fixed official exchange rate for the Zimbabwean dollar to a floating rate based on what willing buyers are prepared to pay willing sellers has produced some strong negative results as well as some of the positive results expected when the new system was introduced.

Most expected a burst of higher inflation for a short time while distortions that had been building up for some time were flushed from the economy, but no one expected the severity of the price rises the country has seen in the last few weeks, largely driven by the dramatic fall in market exchange rates.


In retrospect, it would have probably been better to have phased in the changes, rather than have gone for a "big-bang" liberalisation, and it almost certainly would have been better if a "war fund" of foreign currency had been built up first to cushion the shock. The dramatic shifts in exchange rates in the banks has been driven by a number of factors, some reasonable and some the result of sheer greed.

First, as hoped, the official banking markets took a large share of the currency trading that was dominated by the black market. Unfortunately the black market traders then started pushing up their rates, the bank rates had to chase these to be competitive and a nasty negative feedback loop was established. The black market traders were able to push their rates, it has become apparent, because of a miscalculation. It was assumed, and most available evidence pointed in that direction so the authorities are not to blame, that the bulk of black market trading was to allow business in Zimbabwe to continue operating.

The new legal but market driven system was supposed to switch much of that trading to the banks with a rational rationing system imposed on buyers to ensure that each critical sector had a fair share of the cake. It is now apparent that the black market was feeding a far greater share of what it was buying to those wanting luxuries and those wanting to externalise their paper gains, won by shuffling paper in a high inflation environment.

Inflation tends to be the opposite of Robin Hood; it moves wealth from the poor and middle classes to the rich. A lot of cash was sloshing around the homes of this new obscenely rich class of dealers and speculators and they want fancy imported cars and liquor and want nest eggs outside the country, possibly to insure against the day when the law, if only in the form of the tax collectors, catches up with them and they have to flee.

Such people cannot buy currency for luxuries or foreign bank accounts from banks. That money has to go to productive uses, or for critical imports like food and medicine. Yet they had so much wealth in Zimbabwean dollars that they were prepared to pay whatever it took to buy their hard currency, hence the ever rising black market rates. The Reserve Bank of Zimbabwe believes, with some hard evidence, that some in the banking sector are not playing with a straight bat and are succumbing to the temptation of dealing for speculative profit. They too have been pushing up bank rates, and hence in a reverse move forcing the black marketers to push up their rates which the legitimate bankers have to follow.



With fast moving exchange rates there are obvious temptations to the less scrupulous bankers to make a quick fortune, despite the Reserve Bank's efforts to keep this to a minimum by forcing banks to close their books each day. Fuelling the problem has been the fears of the ordinary person, trying to find a way of coping with the horror of daily rises in prices. Such people do tend to retreat into buying black market currency on pay day and selling it in dribs and drabs through the month to buy the basic necessities of life. This market is an effect of inflation, rather than a primary cause, and as inflation drops will diminish drastically.

The bubble in exchange rates has to be pricked, but the main thrust needs to be on hunting down those who wasted so much. Banning imports of certain expensive luxuries would be a good start and being more thorough in border searches to prevent people leaving with more than the modest legal limits in foreign currency would help.

With these pressures out of the markets there is a good chance the benefits of the floating rate will easily outweigh the negatives.


Source: Copyright © 2008 The Herald.