He set the local dollar lose, called it the RTGS Dollar (electronic dollar) and allowed it to float. In June 2020, just two years later, the local currency was trading at 135 to 1. Inflation in local currency, tied almost directly to the exchange rate went to 850 per cent in mid-year. Suddenly we were poor again.
The common expectation at that point was that it was ‘business as usual’ and that the local currency would be at 200 to 1 by the end of the year. However, we had not read the game plan, it was called the Transitional Stabilisation Programme or the TSP. This had been published in August 2018 by the new Government and most of us had dismissed its contents as just another State false vision of where we were going. The reality was very different.
But we were wrong, the new Government implemented the TPS! They balanced the budget, reduced recurrent expenditure and raised taxes. They allowed inflation to devalue our stock of electronic US dollars to more realistic levels and they curbed the printing of money. Someone said they threw away the printing press. Slowly the fundamentals started to assert themselves.
In June 2020, the decision was taken to start a formal market for foreign exchange. The reason for this was the failure of the Banks themselves to do this, the appreciation that, at 135 to 1 the local currency was seriously undervalued and the direct correlation between the exchange rate and inflation. Money supply was no longer the cause of our inflation.
The auction had an immediate impact – at the first auction we sold US$15 million with a wide spread of bids, rapidly the market settled at 82 to 1, we were right the local currency was worth much more than 135 to 1. Over the next year the turnover on the auction rose to nearly US$2 billion per annum, sales on the interbank market to about US$800 million and transactions for local US dollar bank accounts to US$2,8 billion – all at the indicative rate of 85 to 1. This means that the parallel market had shrunk from almost 100 per cent of trades in the early part of 2020 to perhaps 20 per cent today. Even on that market the rates strengthened and then declined to where they are today at about 125 to 1.
Debate rages as to what the correct exchange rate is – many arguing that the only real market is the street where you can change money day and night. They claim the auction rate is somehow manipulated. To the extent that the auction rate is determined by the weekly bids by about 600 companies, they are right. What is now required is for the people holding USD balances to offer them on the auction at a rate they demand. This has happened only three times – right at the start two NGO’s sold US$550 000 on the market at 90 to 1. Just recently a major mining company put US$15 million on the market and accepted the weighted average exchange rate. If this happened, then we could gradually move to a more normal system, where the Banks fix the rate every day on the basis of supply and demand.
Given that we have a small surplus of hard currency on the formal market and maybe a significant surplus when the informal market is included, it is my view that under such conditions the local currency would quickly become overvalued. At that stage I would argue that the Reserve Bank should intervene as a buyer and build up our hard currency reserves. That is exactly what the Asian Tiger economies have done with great success.
But there is no doubt in my mind that we Zimbabweans are now much better off than we were, that what we earn, even though it is less than we want, has real buying power. But even better than that, our economy is now on a sound footing and starting to grow rapidly in real terms. If we stay on course into the future, it is just possible, that we could join that small group of national economies that are now delivering a higher standard of living to their people.
Eddie Cross
Harare 22nd May 2021
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