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Stability, but at what cost?


FOR what seems like an eternity in the Zimbabwean markets, the local currency has held its fort in trades against the United States dollar.

Defying the norms, the unit has actually strengthened and managed to hold on to gains against the greenback moving from lows of ZW$1 000 per United States dollar (USD) to the current 700-750 levels prevailing on the parallel market.

The gap between the auction rate (which many believe was artificial) and the parallel rate has also narrowed to about a 20% premium and if the trend continues near-term convergence is likely.

The currency stability is surely a welcome development for business and monetary authorities should be applauded for finally reigning in their thirst to spend and pump money into the market on a daily basis.

Business has for a long time been clamouring for market stability and this stability is prevailing in the interim. How long this will last is a question for another day but as of now, business needs to make hay while the sun still shines.

Currency instability was making it difficult for businesses to plan cash flows and this had resulted in excessive forward pricing across the entire market making goods and services priced in the local currency exorbitant for most players.

Government, by virtue of being the largest economic player in the market, was bearing the brunt of the forward pricing regime and was being forced to finance projects at inflated costs. Consequently, the amount of money being pumped into the market was excessive over a short period of time resulting in the dumping of the local currency in search of a store of value and sending the ZWL into new nadirs weekly.

Government, in their own words, realised that the economy was overheating and overhauled their spending structure. The money supply taps were abruptly cut and a new raft of measures was introduced with the biggest sledgehammer in the tool box being the hiking of interest rates to 200%.

However, by the law of unintended consequences, the decision to start drip feeding liquidity into the market also exposed who the chief culprits were when the currency started going on a free-fall. It is now crystal clear who pumps excessive ZWL currency into the market causing rates to spiral.

Spare a moment for the business leaders who were previously labelled as economic saboteurs, miscreants and societal malcontents among other ominous terms in days past.

Some had to spend days as guests of the state in cells for spending money they had received in ways that police officers and other law enforcement agencies deemed unlawful.

Perhaps it would be best that when the next wave of arrests starts, the law sweeps across right to the source of the market instability.

The manner in which liquidity was freely flowing into the market points towards deficiencies in the control of budgeted expenses and financing of long-term projects.

It is untenable that the government resorts to cash budgets. Large projects cannot be financed by current expenditure with the expectation that markets will remain stable.

The current status quo in which there is relative economic stability is an opportune time to develop and reintroduce bond markets in the economy.

Funds raised from the bond sales can then be used to finance capital projects that the government is investing in such as the construction of roads, dams and hospitals among other things.

The biggest threat to the economy remains the risk of inflation and apathy towards long-term investment commitments due to the lack of clarity on how monetary authorities intend to curtail inflationary pressures. 

To counter this, in the meantime, tailor-made bonds that are linked to inflation could be the panacea. Inflation adjusted bonds will remove the risk of the value of investments being eroded by inflation if done in the local currency.

Another avenue that could be explored might be ensuring that all participants in government capital projects play a part in the bond markets.

For one to qualify in long-term tenders then perhaps they need to have some prescribed bond assets in their portfolio that lock them in the long haul. This would remove the risk of speculative currency dumping once they receive their payments.

The one-hammer-suits-all approach to cut invoice values is not the best of solutions. There will likely be compromises on the quality of work done if all invoices are abruptly cut. 

Agreed, forward pricing was now the norm but it was only so because no one knew the exact day they would be paid for their invoices.

Going forward, the government should be clear to contractors on payment terms so that the risk of someone pricing an inflow with an unknown future timeframe is minimised.

The other tool employed by monetary authorities of hiking interest rates to 200% levels has been a death blow to genuine business.

There is absolutely no product in the market that can be financed at a cost of 200% plus that can still be sold at a profit. Businesses will try as best as they can to push this financing cost to the consumer.

The high cost of financing is an incendiary to inflation. For any geared business to remain afloat they will simply need to raise the cost of goods or services they offer and this is already happening in the market.

For instance, the cost of medical aid and internet data priced in the local currency have been spiralling up in the last few months even though the real exchange rate has been fairly stable.

There has not been a corresponding realistic fall in prices as the ZWL strengthened as compared to the manner in which business tends to correlate hiking prices to falling exchange rates on the flipside.

The hike in interest rates was meant to curtail bank lendings. Granted, part of bank borrowings was being funnelled to the parallel market but only so as a store of value and as a way in which to fund imports.

If conditions were stable, business would actually vouch for transactions to be conducted in the local currency. If banks were able to provide the requisite foreign exchange needed by business and the value of the local currency were kept stable then there would absolutely be no need for business to keep large foreign cash balances in their vaults.

If one visits any of the countries in the region, they will realise that South Africans prefer their rand, Batswana their pula and Zambians their kwacha.

Zimbabweans, before the hullabaloo of currency collapses, loved their Zimbabwean dollar in days gone past and this could be revived.

The punitive interest rates on the contrary make this wish unachievable. For an economy to grow, there has to be appetite to expand business operations and this is financed by debt.

There is no business that has grown worldwide without access to capital markets and banks provide such lendings. Any corporate that has grown to reach global business levels has had some sort of leverage at some point in their growth cycle.

Managed debt is healthy for economic growth particularly in the Zimbabwean context.

The impact of economic sanctions imposed on the country means that local companies have very minimal access to external debt. It is extremely difficult if not impossible for a Zimbabwean company to access lines of credit from international financial institutions.

This explicitly means that most local companies can only finance their business ventures using local banks. However, the usurious high interest rates firmly shut the door in their faces.

For as long as this current situation exists, we should expect some businesses to fold and it will be a field day for bank lawyers trying to salvage liquidity from collateralised borrowings.

Nyakufuya is a businessman and a former banker.

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