THE viability of the new currency, Zimbabwe Gold (ZiG), and the efficacy of a thriving interbank foreign exchange market would be significantly influenced by government’s capacity to reduce its deficit-financed expenditure activities, Old Mutual Securities has said.
The securities firm stated in its review of the monetary policy statement (MPS) that the central bank wants to lessen the activities of the parallel market and move foreign exchange trading through formal bank channels with a more transparent pricing structure.
This is in response to central bank governor John Mushayavanhu’s recent announcement that the nation would be switching to the willing buyer, willing seller approach in place of the foreign exchange auction system.
The governor indicated that the bank would continue to provide trading liquidity to the market using the 25% surrender proceeds from exports.
“The effectiveness of a vibrant interbank foreign currency market and the sustainability of the new ZiG will be largely determined by the ability of the government to cut back on its deficit-financed expenditure activities,” the securities firm said.
“Our hope is that the valuable lessons learned in that period will be applied to ensuring that quasi-fiscal activities are not repeated, and the ZiG will be able to hold its value.”
The firm added that the second pillar to the success of this policy was ensuring that the export industries’ operating environment was conducive to competitive commercial enterprises.
“The MPS [monetary policy statement] policy measures are a step in the right direction. Both fiscal and monetary authorities should maintain a strategy of mopping up excess ZiG liquidity and boosting the productive capacity of all export-related industries as critical priority areas,” Old Mutual said.
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Companies that have strong financial positions and foreign currency generation, according to the firm, were expected to perform well in the outlook.
Following the introduction of a refined interbank foreign exchange market, all outstanding auction allotments will be converted into ZiG and issued out as non-interest-bearing non-negotiable certificates of deposits at the current interbank exchange rate, with a maturity of 24 months at an interest rate of 7,5% per annum.
While the industry has said this had a devastating effect on its operations, the central bank governor last week said he was not going to budge.
