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Zimbabwe forex auction system ill-advised: Analysts

by Staff reporter
19 Jun 2020 at 08:15hrs | Views
GOVERNMENT'S re-introduction of the forex auction system as Zimbabwe effectively re-dollarises could have disastrous consequences because the country does not have adequate sources of foreign currency, economic commentators have warned.

Analysts have emphasised the need for a political settlement if re-dollarisation is to be sustained.

The government's decision to pay civil servants a United States dollar-denominated allowance is seen exerting pressure on the private sector to pay forex-based salaries. However, most companies cannot afford the forex auction system and are likely to source forex on the parallel market, fuelling the exchange rate.

On Wednesday, the Ministry of Finance announced the US dollar allowance, while the Reserve Bank of Zimbabwe governor John Mangudya introduced a forex auction system and also directed shops to display prices in both local and foreign currency. The civil servants will not receive hard cash, but electronic cards for shopping.

Senior trade economy Gift Mugano told the Zimbabwe Independent that in view of Covid-19, foreign receipts are likely to drop by US$3 billion, worsening the country's forex woes.

"Normally, this system works where there are no market failures but you also have to be careful how you manage the rate. We do not have supply of foreign currency and that is the reason why it failed the last time, because you will need the funds to liquidate the auction," Mugano said.

"Government does not earn foreign currency, maybe through tax, but it will take some time. During this time lag, it will have to buy it obviously on the black market. Dollarisation creates a squeeze on the economy, it can even crash. The conditions of the system are a minimum of US$50 000 and maximum being US$500 000. How many companies can afford it? They will go on the black market. Where there is an alternative market, people usually opt for that.

"Again, look on the trading days. These are the dynamics that make Zimbabwe unique. Zambia did and was successful because they did not have these volatility challenges like we have. Sustainability for both the system and dollarisation is going to be very difficult as long as we are not earning the forex."

The country earns foreign currency from four main sources, namely exports, diaspora remittances, investment and lines of credit.

The forex trading system has previously failed and was abandoned in 2005 when then central bank governor Gideon Gono replaced it with the exchange rate float.

Last year, the government introduced a mono-currency system, but self-dollarisation was set in motion because the local currency fast lost value, culminating in the government caving in.

Early this year, the central bank said the country had registered significant progress in embracing the Zimdollar. However, analysts have in the past warned that dedollarisation in Zimbabwe would not work because the country did not have the right economic fundamentals.

Mugano said dollarisation will definitely force the Zimdollar into extinction. The only sustainable solution is a political settlement.

"In times of crisis, it's not the central bank that is the lender-of-last-resort. It's the multinational banks and for you to get that money it only happens when you have a good political environment. We have had our problems that deter fresh capital from coming in," he said.

"So, when I say we need a political answer, you have seen how we got fresh funding during the GNU (Government of National Unity from 2009 to 2013). Government can refuse it today, but eventually they will have no choice if they really need to finance this dollarisation."

However, financial analyst George Nhepera said the government's decision to pay a US dollar-denominated allowance is primarily intended to achieve two positive outcomes to the benefit of the country and its citizens.

"It shall stabilise both inflation and exchange rate, especially when the electronic payment system is to be used in making payments for goods and services. The central bank has indicated that domestic payment infrastructure, like we used to have in 2008, is going to be put in place. On the auction system, I prefer to wait and see how it works. I will therefore not comment on it," he said.



Source - the independent

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