Sunday , May 22 2022

Currency options for Zimbabwe


Zimbabwe must introduce a hybrid foreign currency management system or create a US dollar-type US dollar bond to keep its savings on the backdrop of currency chaos, announced renowned economist Ashok Chakravarti.


A hybrid market, according to the investment, is an exchange of securities that facilitates trading through a combination of an automated electronic trading platform and a traditional floor brokerage system.

Brady's bonds, on the other hand, are guaranteed by an amount equal to 30-year treasury bonds with zero coupon.

Issuing countries purchase from US Treasury coupons with a maturity corresponding to the maturity of the individual Brady bond.

Chakravarti's proposal comes at a time when dollarisation led to Zimbabwe becoming a high-cost economy characterized by a perpetual shortage of cash.

This led to a severe shortage of foreign currency at parallel market rates and to USD 10 billion in real-time gross settlement balances (RTGS) of uncertain value.

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

"The government should introduce a hybrid currency management system based on the Nigerian auction model: retention of all exporters by the Zimbabwe Central Bank Reserve at 1: 1 will ensure a proper forex for essential imports and maintain price stability" .

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

He said that 50% of export receipts would be sold through the banking system on a transparent platform similar to the Nigerian investors and exporters' window.

The total amount available on this market is $ 3.5 billion.

"Access to the platform is gradually expanding from priority imports to invisible transactions and capital account. The platform allows for the discovery of the fair value of the exchange rate, rather than the use of index 4, the Zimbollar index or the border in South Africa," he said he.

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

To prevent excessive depreciation of RTGS balances, Chakravarti said a high-yielding Brady bond could be created.

"This bond can be changed for a certain part of TBs held by the banking system at 1: 1. Banks can then allocate them to deposits that want to quit some of their RTGS balances," he said.

"The new obligation will have to be backed by the guarantee, otherwise there is no difference between it and any other public debt instrument, and a dive fund can be created that can be invested in zero dollars in US dollars.

"The current price of the 30-year scriptures with maturity in 2048 is 36.27, meaning $ 1 billion of this bond can be guaranteed by today's purchase of $ 360 million. "

The United States zero coupon allows investors to hold the interest and principal components of eligible treasury bills and bonds as separate securities.

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

"It will generate $ 100 million a year to fund the diving fund. The link should be fully tradable in Zimbabwe," he said.

The Zimbabwe University lecturer said that suggested schemes would benefit Zimbabwe in many ways, such as the elimination of discretion and corruption, the correct discovery of prices on a credible and large currency market, the convergence of rates as the availability of forex over time, and the creation of a bases for introducing the local currency at a later date.

Introducing the Brady link with the diving fund would preserve the value of savings.

"Zimra (Zimbabwean Expense 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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