Expert says full scale Dutch-Auction system will salvage the ZW$ from total collapse

Persistence Gwanyanya

DESPITE growing concerns over the depreciation of the local currency, it appears no one expected the situation would get so bad so fast.

Not even the suspected drivers and benefactors of economic instability could have envisaged the current situation ostensibly because, unlike in the past, there was no notable trigger factor(s) of instability this time around.

As such, it is advisable for policymakers to direct all their energy towards extinguishing exchange rate and price volatility before they evolve into a full-blown crisis.

An in-depth analysis of the sudden decline of the Zimbabwe dollar indicates that a scenario called hysteresis could be at play.

This is a situation of dollarisation reaching a tipping point after the shocks in December 2022 — driven by lumpy payments to contractors and suppliers — were sustained by historical memories of losses suffered due to hyperinflation and dollarisation.

Exchange rate and price volatility, which set in during the festive season, has been accelerating since the beginning of the year.

The depreciation of the Zimbabwe dollar has progressively reduced its appeal, as the market is still hounded by memories of historical losses.

Not surprisingly, market agents now tend to offload it at the slightest opportunity.

And this tends to speed up dollarisation through a vicious cycle of increased dollarisation, dwindling Zimdollar preference and accelerated Zimdollar depreciation.

In medicine, hysteresis is common in situations of organ failure — mainly of the kidney, liver and heart — which often results in sudden death.

The organs fail slowly until they totally collapse.

Medical practitioners normally deal with organ failure by supporting the organs and reducing their exposure to danger.

Consistent with the medical treatment of hysteresis, the immediate reaction to save the local currency would be to close the arbitrage gap in the exchange rate and re-establish the equilibrium between the interbank and parallel market rates.

The Reserve Bank of Zimbabwe (RBZ) has started the process by implementing a wholesale Dutch foreign currency auction system, which saw the interbank rate jumping to US$1: $2 577 from US$1: $1 405 compared to the parallel market rate of US$1: $3 500-4 000 in two weeks.

After re-establishing the exchange rate equilibrium, there is need to increase demand for the Zimbabwe dollar mainly through taxes, duties and fees payable to Government and its agencies. Government commands more than 70 percent market power.

The operationalisation of the digital gold tokens for transactional purposes is also seen as boosting demand for the local unit.

Full implementation of this second phase of the digital gold tokens is expected by mid-June this year.

The digital gold tokens will make a huge impact if large wholesale and retail outlets start trading with these instruments.

The e-gold wallets will support wider market reach, including the informal sector. These measures need to be complemented by judicious liquidity management by Government.

Lumpy payments to contractors and suppliers should be discouraged.

Government is also advised to consider settling a portion of suppliers’ invoices in digital gold.

This is necessary to balance Zimdollar, forex (US) and digital gold tokens for payments to contractors and suppliers.

It will also be prudent for the RBZ to clear the foreign currency auction backlogs and religiously observe the wholesale Dutch foreign currency auction guidelines.

The central bank should, therefore, expedite the operationalisation of the wholesale Dutch auction system, which involves selling foreign currency to the banks for onward sale to the market under a willing buyer, willing seller market system.

A more competitive market for foreign currency is necessary to close the arbitrage gap, as it offers a more efficient price-discovery mechanism.

This is necessary to support voluntary foreign currency liquidations, as well as its increased access in the market.

Foreign currency averaging US$800 million to US$1,4 billion has been lying in foreign currency accounts for a long time as holders are not willing to voluntarily liquidate due to what they see as uncompetitive interbank exchange rates.

Most importantly, in view of the unhealthy structure of our economy, which is driven by a few large and influential corporates and individuals, there is urgent need for dialogue between stakeholders.

Engagement can durably lift suspicion and fear, which is holding back the economy. Whilst we do not underestimate the enormity of the task that lies ahead, we are fully confident that a return to stability is possible.

Remember, last year, when Government was similarly challenged, a raft of measures that were implemented then saw relative stability from August to November 2022.

Decisive action is needed once again.

Persistence Gwanyanya is the founder and vision consultant of Bullion Group. He is also a member of the RBZ Monetary Policy Committee. He writes in his personal capacity. For feedback, WhatsApp on +263773 030 691.