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Floating of bond notes not a solution

by Staff reporter
14 Feb 2019 at 10:18hrs | Views
Floating of the bond notes is not in itself the solution to the challenges currently bedevilling the Zimbabwean economy, but rather proper financial management fundamentals must be put in place as a way of sending the right signal to that market, according to analysts.

The implications on floating of the bond note vary and will depend on government behaviour thereafter. The immediate impact is inflationary. Floating will entail some adjustment to prices especially to those that have been determined by the parity.

Speculation might kick in depending on how people see the currency. But ultimately stability of the exchange rate will depend on government's behavior in printing money. If they adhere to budget this might help.

Economic analyst, Moses Chundu said there is need for authorities to stop using a piece meal approach to issues and rather go back to basics and do the right thing.

He said any move towards currency reforms must be backed by proper fundamentals that will anchor any move going forward while also making sure there is enough confidence from the market.

"The drama about the currency issue keeps going on but what I understand is that floating the bond note is in another way putting an official value to the currency.

"But we need to understand that the piece meal approach being used by the authorities in handling this currency issue is not helping matters because somehow they are not following the correct fundamentals to build trust first in the financial system," said Chundu. "At the moment even if we say it's now 1:10, we are still going to plunge back to the mess that we are in right now. We warmed to the 1:1 and look at where we are right now," he added.

But economist Persistence Gwanyanya said floating of the currency was long overdue and the market expects it to go a long way in improving forex allocations.

"I think government should work around the clock to float the currency as it will rationalise foreign exchange allocations and will compensate fully the farmers and miners.

"The floating of the local currency will reduce pressure on RBZ to efficiently allocate forex as the market will now know that the value of bond note is different from the USD value," said Gwanyanya.

Gwanyanya said the monetary policy was expected to address the currency conundrum, occasioned by the insistence of USD/RTGS/ bond currency parity.

He said RBZ's insistence on this parity has created market distortions, which gave rise to arbitrage opportunities and thus promoted rent seeking behaviour.

"All these resulted in the misallocation of the country's resources, including foreign currency. This is why it is necessary for RBZ to fulfill its as well as Treasury's promise to move towards a market based exchange rate system through the adoption of a managed float exchange rate system. This would naturally see the devaluation of RTGS in line with the demand and supply conditions,' said Gwanyanya.

He said the devaluation of the RTGS balance effectively rationalises demand for forex.

"We should always remember that the market is a more efficient allocation of forex than RBZ," Gwanyanya said.

Source - Business Times

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