Exchange rate stability false, economists warn

ECONOMISTS yesterday warned that the current exchange rate stability, which is largely a result of local currency shortages on the market is “false” and will be short-lived.

Economist Eddie Cross said once the government begins paying its suppliers and contractors, the parallel market rate will escalate.

“The current shortfall of domestic supplies of local currency has been due to the measures adopted by the government where the government has halted payment to suppliers of services and goods. The government has also tightened up money supply through the reserve bank.

“This has resulted in the shortage of local currency and the electronic currency. This has had an immediate effect on slowing down speculation in the Zimbabwe dollar against the US dollar (US$) and as a result the local currency has strengthened on the parallel market,” Cross said.

Cross added: “However this is not going to be long lived, the government has to return to meeting its obligation of paying contractors and suppliers, and it is in the process of doing that. Once these payments resume we are going to see a resumption of activity on the parallel market for the local currency.

“The only serious solution to this problem is to liberalise the market for the local currency. This will, in fact, provide a long term solution to the problems we are confronting. Anything else, we are just dealing with the symptoms and not the fundamentals.”

Economist Victor Boroma said the shortage of the local currency on the market was detrimental to consumer confidence.

“As a result of the local currency shortage, retailers eventually reported a significant drop in sales. That means the shortage of money on the market reduces consumer demand,” Boroma said.

“It is not sustainable for the government not to pay its suppliers because it affects public service delivery and also affects the government’s ability to mobilise domestic resources in terms of revenues because most of the former players are not trading well at the moment leading to the liquidity crunch being experienced on the market now.”

Africa Economic Development Strategies executive director Gift Mugano described the shortage of the local currency as false stability.

“The shortage has managed to hold the rate at a stable position but this shortage of the Zimdollar is a false stability. It is false stability because it is fragile and dangerous since it cannot sustain, soon the rate will run away,” Mugano said.

“We are also fast dollarising as a number of companies in the private sector have begun pricing in US$ and the Zimdollar has already been relegated. Even local councils and some government departments such as the passport offices are pricing strictly in USD. Demand has taken a nosedive as the customer traffic has declined.”

Mugano added that companies which are involved in provision of service to the government, face closure because their cash flows will be constrained.

Meanwhile, local think-tank Akribos Research Services (Akribos) warned of stunted economic growth despite the introduction of gold coins to mop up excess liquidity and suspending payment of government contractors to manage liquidity.

“However, on the other hand, despite achieving stability, we expect the results to be short-lived. The temporary suspension of payments to suppliers and contractors has a trade-off effect on GDP as it slows the pace of ongoing projects in the agriculture, mining and infrastructural development sectors. We expect the Treasury to lift the ban in the near term as it implements the 2022 supplementary budget ($929bn),” Akribos said.

Due to limited access to forex through formal channels, Akribos said, most suppliers and contractors would continue to resort to the parallel market to import raw materials.Newsday

Leave a Reply

Your email address will not be published.