Currency options for crisis-ridden Zimbabwe

Zimbabwe needs to introduce a hybrid foreign currency management system or create a long maturity US$ Brady type bond to preserve savings amid the currency chaos, renowned economist Ashok Chakravarti has advised.

A hybrid market, according to investopedia, is a securities exchange that facilitates trading through a blend of an automated electronic trading platform and a traditional floor broker system.

Brady bonds, on the other hand, are collateralised by an equal amount of 30-year zero-coupon treasury bonds. Issuing countries purchase from the United States treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond.

Chakravarti's proposal comes at a time when dollarisation has resulted in Zimbabwe becoming a high-cost economy, characterised by   perpetual cash shortages.

This has led to severe shortage of foreign currency, parallel market rates and $10 billion in realtime gross settlement (RTGS) balances of uncertain value.

As a solution to this, Chakravarti said government should introduce a local currency with monetary controls and a proper market-based exchange mechanism against the US dollar. This, however, is not possible without pre-conditions, he warned.

"(Government should) introduce a hybrid forex management system based on the Nigerian auction model: 50% retention from all exporters by the Reserve Bank of Zimbabwe at 1:1 will ensure adequate forex for essential imports and maintain price stability," he said.

For that to happen, Chakravarti said total forex needed was $2,5 billion. He said 50% of the export proceeds would be sold through the banking system on a transparent platform similar to the Nigerian "Investors and Exporters Window". Total forex available in that market is $3,5 billion.

"Access to the platform is gradually expanded from priority imports to invisibles and capital account transactions. The platform permits proper forex rate discovery rather than use of 4th street, Zimbollar index or across the border in South Africa," he said.

He said available lines of credit are used to smooth the availability of forex on the platform on a month-to-month basis. To prevent the value of RTGS balances depreciating excessively, Chakravarti said a long maturity US dollar Brady type bond could be created.

"This bond can be exchanged for a certain proportion of the TBs held by the banking system at 1:1. The banks can then allocate these to deposit holders who wish to extinguish a part of their RTGS balances," he said.

"The new bond will have to be supported by collateral; otherwise there is no difference between it and any other government debt instrument. For this purpose, a sinking fund can be created and invested in zero coupon US dollar scrip. "Current price of 30-year scrip maturing in 2048 is 36,27 that is $1 billion worth of this bond can be collateralised by purchasing 360 million worth of scrip today."

United States zero-coupon scrip allows investors to hold the interest and principal components of eligible treasury notes and bonds as separate securities. Chakravarti said a 3% tax should be levied on the forex auction platform.

"This will generate $100 million a year to fund the sinking fund. The bond should be fully tradeable within Zimbabwe," he said.

The University of Zimbabwe senior economics lecturer said the systems suggested would benefit Zimbabwe in many ways such as elimination of discretion and corruption, proper price discovery in a credible and large forex market, convergence of rates as forex availability increases over time and creation of a basis for introduction of local currency at a later date. Introduction of Brady type bond with sinking fund would preserve value of savings.

"Zimra (Zimbabwe Revenue Authority) should use daily rates generated by the auction system for calculating import taxes," he said.

"This will eliminate distortions and corruption and generate additional revenues to cover the fiscal deficit, if any."