Persistence Gwanyanya
IT is now very clear that this time around, Government is more determined than ever to revive the Zimbabwe dollar to its pre-eminent status.
By instituting stability measures barely two months before the general elections, Government has made a bold statement about its commitment to stick with the local currency.
Historically, the Government would embark on populist policies, which entail loosening the monetary policy, to support election-related expenditures.
As such, the current monetary tightening represents a break from the past.
Whilst it can be argued that tightening was inevitable given the historic slide of the Zimdollar in the last two months, it is difficult to reconcile the same argument to what the market now views as over-tightening.
This only shows Government’s unflinching commitment to Zimdollar stability.
As the Zimdollar continues to gain in value, the goods and financial markets should adjust accordingly. Following a massive jump in Zimdollar prices on account of accelerated depreciation of the currency, business should now reduce their prices, in line with the cooling exchange rates. There is a strong pass-through effect — almost 100 percent — of exchange rates on prices in Zimbabwe.
As such, contrary to the traditional view of price stickiness, a reduction in prices is inevitable in our scenario.
Business must realise that the boom in demand, driven by the need to offload the weakening Zimdollar at every opportunity, is coming to an end.
As demand normalises, competitiveness will be defined by the ability to price to attract the increasingly scarce Zimdollar.
Surprisingly, there are many who are still to wake up to the new reality and continue to index their prices to crazy rates, way above the parallel market rates.
Of course, there may be need for business to gradually adjust their prices, as some had taken positions at higher Zimdollar exchange rates, including interbank ones.
Remember, the interbank rate peaked at about US$1:$7 000, before cooling off to around US$1:$5 000 currently.
While gradual adjustment of prices is expected, slow adjustment will be detrimental to business. There is a high risk of pricing oneself out of business by failing to adjust to the market dictates. Despite pivoting towards market liberalisation, the Government normally gets concerned about resistance to adjust to market realities when products concerned are essentials and where the market players have a tendency to collude.
This could be the motivation behind the recent notice of intention to withdraw or suspend the operating licences of the 11 pharmaceutical companies that were indexing their prices to some outrageous exchange rates, ranging from US$1:$9 000 to US$1:$11 000.
Clearly, such behaviour is uncalled for, particularly in an environment where Government is signalling its unwavering commitment to resuscitate the local currency.
Given the centrality of the pharmaceutical business in the economy, this constituency has the tendency to influence the economy in a certain direction, which may work against the stabilisation measures.
While Government understands that pharmaceutical retailers are exchange-rate takers, who rely on wholesalers and distributors’ pricing models, it strongly believes the culprits are outliers, who are indexing prices to exchange rates that can even be regarded as outrageous relative to the just-ended period of market madness.
Going forward, it is prudent for the Government to further understand the pharmaceutical value chain and pricing modalities, as retailers rarely import medicines and, therefore, may not access forex from the interbank.
Normally, wholesalers and distributors are the ones who import products as authorised dealers and have access to the interbank market. If everyone in the value chain is responsible, such cases can be minimised.
There are dissenting voices that are worried about the effect of what they view as over-tightening on business viability and survival.
They argue that if demand continues to fall on account of stabilisation measures, some businesses will be forced to scale down operations or even shut down.
They argue, if Government is not careful about when to loosen, the consequences could be dire.
However, given the dollarisation levels of 80 percent, premature loosening is not prudent.
Instead of loosening the Zimdollar supply, business may need to liquidate their foreign currency holdings to meet Zimdollar requirements.
The challenge at the moment, however, is that we are all looking for the Zimdollar at the wrong address — the parallel market.
If Government presses ahead with Zimdollar demand for mainly taxes and duties, voluntary liquidations will inevitably increase.
The local unit will always be available in the interbank market, as banks that are short of it can approach the Reserve Bank of Zimbabwe (RBZ) for voluntary liquidation of foreign currency. Encouragingly, voluntary liquidations are starting to pick up.
Out of about US$110 million traded in the interbank market, US$67 million was injected by RBZ/Treasury and the balance was from interbank liquidations, which is a significant improvement from amounts prior to implementation of stabilisation measures.
As voluntary liquidations increase, the market is expected to become self-liquidating, thus restoring the monetary balance, in line with the pace of de-dollarisation.
Following many years of an inactive interbank market, banks have to up their game, retrain and upskill their staff.
Treasurers have to be agile and measure up to the task. Banks must be able to trade with each other before they approach the central bank for support, especially Zimdollars.
After all, that is the essence of an interbank market. Currently, the level of financial disintermediation is still high, as the interbank is being resuscitated and bankers are still adjusting to new realities.
It is wise for RBZ to increase its engagement with banks on the trajectory we are taking as an economy.
RBZ should stand ready to assist banks in case of need. It is prudent for business, Government and everyone alike to cope with the new normal economy for the country to move forward.
The new normal economy is anchored in the Zimdollar as a currency of preference by Government. Needless to emphasise that full dollarisation is not a viable policy option for Zimbabwe today.
Persistence Gwanyanya is a member of the RBZ Monetary Policy Committee. He is also the founder of Bullion Group International. He writes in his personal capacity. For feedback, use +263 773 030 691
