Tuesday , April 20 2021

Foreign exchange options for Zimbabwe in crisis



Zimbabwe needs to introduce a hybrid foreign currency management system or create a long-term Brady bond to preserve savings amid currency chaos, advised the renowned economist Ashok Chakravarti.

FROM MTHANDAZO NYONI

A hybrid market, according to investopedia, is a stock exchange that facilitates trading through a mix of an automated electronic trading platform and a traditional floor brokerage system.

Brady bonds, on the other hand, are secured by an equal amount of 30-year zero-coupon Treasury bonds.

Issuing countries purchase the United States Treasury zero coupon bonds maturing the maturity of Brady's individual bond.

Chakravarti's proposal comes at a time when dollarization has resulted in Zimbabwe becoming a costly economy characterized by shortage of perpetual cash.

This led to a serious shortage of foreign currency, parallel market rates and $ 10 billion in uncertain real-time gross balances (SLGS).

As a solution to this, Chakravarti said the government should introduce a local currency with monetary controls and an appropriate market-based exchange mechanism against the US dollar. This, however, is not possible without preconditions, he warned.

"(The government should) introduce a hybrid currency management system based on the Nigerian auction model: the retention of 50% of all exporters by the Zimbabwe Reserve Bank in 1: 1 will ensure the proper forex for essential imports and will maintain the price stability, "he said.

For that to happen, Chakravarti said the total investment needed was $ 2.5 billion.

He said that 50% of export revenues would be sold through the banking system on a transparent platform similar to the Nigerian "Investors and Exporters Window".

The total forex available in this market is US $ 3.5 billion.

"Access to the platform is gradually expanded from priority imports into invisible and capital account transactions. The platform allows the discovery of appropriate forex rates instead of using the index of the fourth street, Zimbar, or across the border in South Africa, "he said.

He said the available credit lines are used to smooth the availability of forex on the platform on a month-to-month basis.

To prevent the value of the RTGS balances from depreciating excessively, Chakravarti said that a long-term US dollar bond could be created.

"This security can be exchanged for a certain proportion of the TBs held by the banking system in 1: 1. Banks can then allocate them to deposit holders who wish to extinguish a portion of their RTGS balances," he said.

"The new title will have to be backed by guarantees; otherwise, there will be no difference between this and any other government debt instrument. For this purpose, an amortization fund can be created and invested in a US dollar certificate with zero coupon.

"The current 30-year paper price that is maturing in 2048 is 36.27, and the $ 1 billion worth of this bond can be guaranteed with the purchase of 360 million pounds today."

The United States zero coupon card allows investors to maintain interest and principal components of eligible notes and treasury bills as separate securities.

Chakravarti said a 3% tax should be levied on the forex auction platform.

"That will generate $ 100 million a year to fund the repayment fund. The bond must be fully negotiable within Zimbabwe, "he said.

The senior economics professor at the University of Zimbabwe said the suggested systems would benefit Zimbabwe in many ways, such as eliminating discretion and corruption, proper pricing discovery in a credible and large forex market, rate convergence as forex availability increases over time and creates a basis for introducing the local currency at a later date.

The introduction of the Brady bond with amortization fund would preserve the value of savings.

"Zimra (Zimbabwe Tax Authority) should use the daily rates generated by the auction system to calculate import taxes," he said.

"This will eliminate distortions and corruption and generate additional revenue to cover the fiscal deficit, if any."


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