Money conundrum in Zim, emerging inflationary pressures

Continued from last week

The monetary solution has been illusory for Zimbabwe since the country began to experience hyperinflation in the 2000s. A currency auction once was passed in 2004 and was marred by the “invisible hand” in determination. of the exchange rate. Money creation was another problem at the root of the country’s first currency auction.

The second currency auction is negatively influenced by currency settlement delays over a period of eight to nine weeks, which creates a window for economic agents to source foreign currency on the parallel market. The widening of the premium between official and parallel market exchange rates does not bode well for a country with low productivity and production levels.

The situation was aggravated by the referencing of prices at the parallel market exchange rate. Referencing prices to the parallel market exchange rate illustrates the fact that economic agents lack confidence in the mechanism for determining the exchange rate and in its stability.

About US $ 1.2 billion of FCA accounts should have been part of the foreign currency available to facilitate imports. However, the industry is reluctant to use these funds due to fears of volatile exchange rates and inflation.

Policy must address already seen because inflation expectations are fully anchored in the economy due to the agonizing hyperinflation experiences of the past. Economic agents feel that they have already experienced the current situation in terms of inflation and the erosion of the value of savings. The policy-making process has a lot to build trust.

Go forward

The currency of money is confidence. Economic policy must cultivate a culture of confidence in the economy. The process of policy formulation and implementation should be free from policy inconsistencies, especially those that derail the macroeconomic stability that was being achieved in the economy, as evidenced by the deceleration of the rate. year-over-year inflation from 838% in July 2020 to 162% in May 2021. Month-on-month inflation rate also declined from 36% in July 2020 to single-digit inflation since August 2020.

Measures should be put in place to allow the efficient functioning of the currency auction system. Transparency and accountability in the currency auction can be improved by publishing available resources before the start of each auction. This should help build confidence in currency auctions.

Allowing the currency auction to play its price discovery role will improve the efficiency of the currency auction. This will ensure the efficiency of the allocation. In this way, the premium between the official market exchange rate and the parallel market exchange rate is reduced, thus reducing the opportunities for arbitrage in the economy.

In addition, prompt settlement of foreign exchange transactions through currency auction will starve the parallel market transaction premium, as economic agents rely more on the currency auction system. It will also ensure a unified exchange rate system for price benchmarking in the economy.

Money creation for public spending should be limited to statutory limits in order to support currency auctions. This will ensure that the exchange rate does not work due to an excessive injection of liquidity into the economy, especially at this stage when resources are needed for the supply of grain.

The policy formulation and implementation process should encourage production up the value chain, as articulated in successive national fiscal policies. This will ensure that products that the country can produce with a comparative advantage are produced locally, including sunflower for the production of edible oil and maize for the production of staple foods. The country should strive to locally produce raw materials for agro-processors as cereals including maize, rice and wheat contributed 11% of the import bill in the first half of 2020. The policy may particularly target dairy products, leather and oilseeds. cotton value chains.

The import of petroleum products accounted for 27% of total imports from January to June 2020. This means that in order to save foreign currency, the country must invest in technologies that produce alternative energy sources in order to save foreign currency .

Going forward, policymakers need to implement policies that generate foreign exchange through increased exports and save foreign exchange through import substitution.

Lack of business confidence to invest due to low returns on investment leads to capital flight and capital shortage as domestic and foreign investment decline. According to the UNCTAD World Investment Report 2020, foreign direct investment inflows to Zimbabwe have declined significantly to reach US $ 280 million in 2019, compared to US $ 745 million made before the crisis in 2018. This illustrates the need. to implement policies. that increase investments and grow the national product. Greening domestic production is also essential for sustainable national development.

Bandama is an economist and writes in a personal capacity.

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