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Economists ponder Zimdollar return

by Staff reporter
27 Jun 2018 at 05:50hrs | Views
ZIMBABWE will have to use the parallel market rate to determine the official exchange rate when it introduces a new currency, economic commentators have said.

The country adopted a multi-currency system in February 2009 to tame the adverse effects of hyperinflation that saw among other macro-economic challenges, prices of goods and services skyrocketing.

Since the introduction of the multi-currency system, the country has been dogged by financial distortions and foreign currency shortages which saw the Reserve Bank of Zimbabwe introducing bond notes in 2016 which are rated at par with the United States dollar.

The initiative was meant to boost exports through an export incentive scheme.

As a result of the prevailing financial distortions in the local financial markets, the country plans to re-introduce local currency at an appropriate time.

President Mnangagwa has hinted on the re-introduction of local currency. A fortnight ago, Finance and Economic Planning Deputy Minister Terrence Mukupe told delegates at the CEO Africa Roundtable meeting in Bulawayo that the country should get rid of bond notes and adopt its own currency.

He said this was in light of the prevailing financial market distortions, stressing that if Zimbabwe was to introduce a local currency, it should float at between $1,50 and $2 against the United States dollar.

In separate interviews, economic commentators said the return of the local currency would be informed by the parallel market exchange rate prevailing at the time as a starting point.

"The black market is the main indicator of the exchange rate in the market because clearly the main market has got a lot of distortions, so it may not be a reflector of what is happening in the economy. The best indicator of the exchange rate at the moment is the black market exchange rate," economist Dr Persistence Gwanyanya said.

"So, if we are to take on board a new currency, which maybe through floating of the bond notes, it means that the starting exchange rate should be the exchange rate currently obtaining on the parallel market, which is around 75 percent and that will be the starting exchange rate."

He said with time, the exchange rate in the official market would then determine its accurate level through the market forces of demand and supply.

"An exchange rate of $1:1,75 to $2 will be clearly overvalued for Zimbabwe because what is happening on the black market is not reflecting all the true factors. Going forward we will see the exchange rate self correcting, finding a correct position. If you look at South Africa, the exchange rate is at 1:12 and Zambia 1:10. The exchange rate will also have to be devalued by the market forces depending on the demand and supply factors," said Dr Gwanyanya.

Bulawayo-based economic analyst Ms Wendy Mpofu said a floating exchange rate mechanism would be used to determine the official exchange rate of the local currency against the greenback.

She said depending on the availability and demand of foreign currency, the economy would see its exchange rate varying from time to time to give a true reflection of the market forces on the ground.

"As we speak right now the country doesn't have reserves to support a currency so we shall see that currency depreciating depending on the demand and supply of foreign currency. It (new currency) will depreciate because of high demand and we will have to come up with a rationalisation mechanism for those who are able to pay. And that has a knock-on effect on the removal of the parallel market," she said.

Another economic commentator, Ms Chipo Warikandwa, said the country did not have the right fundamentals to set the tone for the re-introduction of a local currency now.

"Clearly at the moment we don't have the right fundamentals for the re-introduction of a local currency. The biggest challenge is that of the Government's budget deficit. What dollarisation has not achieved is a measure of fiscal discipline, which in the past was a major cause of inflation and the Government's appetite to spend was partly cured by dollarisation but now what we are seeing is a Government that has found some mechanism to circumvent the hand of dollarisation," she said.

Ms Warikandwa said if the country had a healthy fiscal position, it could have been easier for Zimbabwe to remain under the multi-currency regime.

"But now because our fiscal position is not healthy, the Government needs to have fiscal discipline and reduce its huge appetite to spend so that we don't have hyperinflation once more when a new currency is adopted," she said.

Source - chroncile