dyton mupawaenda
THE outstanding success of the ZiG in its first year allowed the Government last week to lift the regulation forcing businesses to use the mid-market interbank exchange rate as their exchange rate when setting prices in local currency and US dollars.
There were some who wondered if this was a big risk, but it is now apparent that the authorities had done their sums properly and the move would not cause any waves but would be useful as one of the measures to cut back on business regulations when these were no longer needed.
It hardly caused a ripple.
The fact that any changes were trivial, often just rounding off the exchange rate being used at the tills which was already set at 10 percent above the interbank rate, roughly the rate street dealers use to buy foreign currency, shows that the strength of the ZiG was established and that the interbank rate continues to guide businesses, rather than the street rate in the black market, or parallel market.
In any case the premium in that street market for the rate the dealers charge when selling US dollars is now around 20 percent above the equivalent rate in the banking system, or less than 10 percent over the rate the business sectors were allowed to use when maximum exchange rates were set by decree. This is why the changes caused hardly a ripple.
With the competition now in the business world, those businesses who thought that deregulation would allow them to chase a far higher exchange rate have had to think again, since their competitors are more than likely to be looking at actual value and their needs to have enough ZiG on hand to pay taxes and other local currency costs.
In any case the black or parallel market is no longer a major factor in Zimbabwean economic life. Manufacturers last year sourced just 3 percent of their foreign currency from this market, and the percentage continues falling, so that unofficial market is no longer that useful.
It has reverted to what it is when currencies are in alignment, useful for money changing at odd times and odd places.
So it is now largely what it is in many countries, simply a convenience rather than something that can be used to manipulate the economy. In a crackdown last year street dealers were driven off the streets. They returned when the clampdown eased, but have now once again vanished because no one found them very useful. There was not enough business to justify sitting in the sun and rain waiting for a very occasional customer.
Those with foreign currency found that retailer rates were so close to the street rate that it made no sense to go via a street dealer, and have to pay transaction taxes and transfer fees which easily absorbed the minute difference between the street rate and the till rate, and quite often more than that small difference.
This has boosted the amount of foreign currency businesses are earning directly, from their customers with dollars, and that again has sharply reduced any need to access the black market. So we have a virtuous positive feedback, that keeps everything legal.
The strength of the ZiG has been built by the Government and the Reserve Bank of Zimbabwe in a co-ordinated set of fiscal and monetary policy measures that have worked very well.
One critical factor has been the building up of reserves at the Reserve Bank, a normal process in most countries, and by the end of last month these had reached US$629 million, well in excess of all the ZiG in existence so the local currency is fully covered. That in turn now allows the Reserve Bank to do what central banks are supposed to do, intervene in markets to cope with any sudden shortages or surpluses of foreign currency and smooth out the general trend, whichever way it is going.
That in turn makes manipulation even harder to profit from, since the sudden jumps that manipulators and speculators need are no longer there, just boring steady market values.
There have been complaints that the amount of ZiG in circulation is on the low side, and that this has reduced liquidity. Considering that a year ago everyone in business was complaining about excess local currency liquidity, this is an odd complaint.
The Reserve Bank has made it clear that it sees much of the liquidity shortage being a result of bad practices by some banks, who want to concentrate their lending and deposits in US dollars and simply ignore their ZiG deposits. Banks which run both businesses, in ZiG and US dollars, are now doing rather well thanks to the stability and transparency in exchange rates, so competition pressures should help.
In any case, the Reserve Bank is maintaining its statutory reserve rate at 20 percent of bank deposits and is using the excess ZiG that those banks who do not want ZiG business are having to deposit with the Reserve Bank to fund a productive lending scheme at lower interest rates. This has the triple benefit of getting more lending into the productive economy, rather than for consumption or speculation, having a lower interest rate for productive borrowing, and easing liquidity shortages.
Once all banks have taken the steps to using their ZiG deposits the way they are supposed to be used, and doing so as a routine business rather than anything special, the Reserve Bank will be able to move to the more conventional liquidity control of lowering and raising the stator reserve percentage as needed. The Government has backed these ZiG strengthening measures, through the assignment of half the mineral royalties to the reserves, often in kind if it is a gold producer paying the royalty, plus its own tight fiscal discipline, efficient tax collection, and a procurement system that demands honesty and value for money. The old quasi-fiscal operations in the Reserve Bank are now full fiscal operations in the Government, so there is no overlap. Although the Government and the Reserve Bank are independent of each other, the country is obviously much better off when they pull in the same direction and coordinate action, and this is what is fortunately happening.
Online Reporter