Lessons from the market

Lessons from the market

For the first time in months, Zimbabweans are scrounging for the Zimbabwe dollar. Never mind that the local unit has been elbowed out in transactions with King dollar accounting for over 70% of transactions.

And for the first time in months, the local currency strengthened against the dollar trading at ZWL$6,326.587 at this week’s wholesale auction from ZWL$6,926.57 last week.

The firming of the local currency comes on the back of tight monetary and fiscal policy measures by the government in the past weeks to halt the free-fall of the local unit.

Some of the measures instituted include the selling of foreign currency by the central bank to banks at market determined exchange rate which has revived the interbank market.

Treasury’s directive that companies pay half of their quarterly corporate income taxes in local currency has created demand for the Zimbabwe dollar.

The shortage has strengthened the local currency. The events of the past few days should serve as lessons to the government.

The first lesson is that the market is king. Fiddling with market forces does not work as amplified by the “collapse” of the foreign currency auction system.

The sale of foreign currency to banks has seen the gap between the official and parallel market narrowing.

The second lesson is that it is the government and not the private sector that should take the lead in promoting the use of the local currency.

It was ironic that the government was pushing business to accept local currency as a legal tender when the same government was collecting taxes in foreign currency and so were its agencies.

This has stopped and the results are slowly trickling in. It is still a long way out of the woods. It remains to be seen if the government can sustain the currency stability as history has shown that it has a tendency of policy flip-flops.

Six months ago, the government instituted tight measures and inflation was checked. However, the policies were soon loosened which triggered the free fall of the local currency.

It is incumbent upon the government to maintain the tight monetary and fiscal policies as Zimbabwe heads to the polls.

Elections are usually associated with freebies and populism. Events of the past months have shown that populism has disastrous consequences and nearly elbowed out the local currency from transactions at a time the government is working on a dedollarisation programme. That over 70% of the transactions were done in dollars flew in the face of plans to make the local unit the currency of choice.

The spike in monthly inflation in June should jolt the government into action. Annual inflation raced to 175.8% in June from 86.5% in May.

The upcoming months are key as they test the government’s sincerity on its policy measures. For now, market forces have prevailed.

Business Times

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