CHRIS CHENGA
Say if Zimbabweans woke up to five real high level governmental and partisan prosecutions, striking the core of the patronage system that has decayed governance for years, what would happen to the parallel market rate? Use this imagery to ponder how representative the parallel market rate is to Zimbabwe’s structural and productive condition. After all, fundamentally isn’t that what exchange rates should mostly tell us; the structural and productive relation between two counter economies?
It is not too far-fetched to imagine that if such prosecutions took place the parallel market rate would definitely fall towards the interbank rate; maybe even towards 1:1 again, depending on who would be prosecuted. Assuming one agrees with this scenario, it could be true that deflated confidence is more significant variable of the foreign currency exchange rates in Zimbabwe than the structural and productive condition of the economy to the USD.
When global analysts or commentators inquire on say the USD:ZAR or the USD:GBP, what is the greatest variable that they’re trying to understand? It is the structural and productive relation between these economies. Internal confidence, is a variable, but less significantly so. Perhaps as the debate of whether or not to liberalise the forex market, often leveraged on doubts of the interbank market rate’s utility as compared to parallel rates, really needs to be re-approached by Zimbabwean analysts and commentators. It is currently in-congruent to normalised global standards of analyses and commentary.
Sure, the parallel market is presently the effective rate in as far as the price of foreign currency in the economy, but that is definitely insuffice context for astute, macro-conscious analyses and commentary. What is the purpose and objective of finding a benchmark foreign currency market? It goes beyond a simplistic concern of what the price of foreign currency is in an economy. A higher intent is to improve the livelihoods of Zimbabweans, which actually isn’t separate from capital interest. So Zimbabwean analysts and commentators should make their assertions be guided by such consideration. The parallel market today, while seeming effective, is grossly devoid of what the real effective rate should tell us about the structural and productive condition of the economy. Currently, it is merely an effective rate to buy or sell foreign currency, but with a very minimal reference to structural and productive outlook of the economy.
Consider for instance, the companies active in the parallel market, are they using the foreign currency to operate efficiently in their core businesses, or many have compromised, if not entirely foregone operational execution for foreign currency trading on the black market? If this has become common practice throughout numerous sectors of the economy, how then is the buying and selling price of the parallel market a strong reference, or real effective rate of industry’s structural and productive consequence? Thus, as parallel market rate itself has become increasingly decoupled from actual structural and productive reference, that market rate is a really weak reference for studying the economic condition of the economy.
Analysts and commentators often miss precise context to critique a central bank, with a continuing disconnect in their recommendations of how a central bank should actually respond to the prevailing situation. The central bank, for all its faults, has not entirely forgotten its crucial institutional need to rely on metrics that are benchmarked to the structural and productive outlook of the economy. For instance, this is the means of a central bank to manage monetary aggregates, or manage regulatory controls. Similar guidance applies to fiscal management. Of the recent sound bites heard from authorities the last several days, Permanent Secretary Guvamatanga’s concerns with the foreign currency in the banking system lying ideal was most encouraging. Government needs to keep pulse of how the velocity of formal and measurable foreign currency is structurally affecting productive output in the economy; a metric long ignored in Zimbabwean discourse.
A fair amount of analysis and commentary has been shared on money supply being cause of inflation, that’s good. But, discourse lacks further inquiry into what size of money supply would structurally and productively accompany a sustainable exchange rate. These are the gaps missing in our analyses and commentary. For a central bank and finance ministry, no matter how seemingly effective parallel market rates are, they cannot be a reference for central policy making. They lack empirical reference to the metrics of monetary and fiscal management of an economy.
The parallel rate is not more telling of the structural and productive outlook of the economy than the interbank market rate is. Such a proposition has yet to be proven; maybe even disproven by a mere scenario which would greatly shift confidence such as prosecutions. Indeed this does not inherently mean that the interbank rate is more telling either. Currently, the two are of lesser importance than seeking normalized structural and productive standards that influence exchange rates. That has to be inspired by analyses and commentary of a higher consciousness. These would help motivate the central bank and finance ministry to enhance best practices in their formal policy making. What Zimbabwe needs are efficiently and effectively governed formal markets that can be relied upon as references to study just how active participants are using foreign currency for structural and productive purposes. Nobody should be chasing the parallel market.
