Monday , October 3 2022

Currency options for Zimbabwe that hit the crisis


Zimbabwe needs to introduce a hybrid foreign exchange management system or create a long-term Brady bond dollar in order to save money in the chaos of the coin, as the well-known economist Ashok Chakravarti said.


A hybrid market, according to Investopedia, is a stock market that facilitates trading through a combination of an automated online trading platform and a traditional floor brokerage system.

Brady bonds, on the other hand, are secured with an equal amount of 30 zero zero coupon bonds.

Issuing countries buy from the US zero coupon government bonds with a maturity equal to the maturity of the individual Brady bond.

Chakravarty's proposal comes at a time when dollarisation has led Zimbabwe to become a high-cost economy characterized by a persistent lack of cash.

This has led to a severe shortage of exchange rates, parallel market interest rates and real-time gross settlement balances (RTGS) of $ 10 billion of uncertainty.

As a solution to this, Chakravarti said the government should introduce a local currency with monetary controls and an appropriate trading mechanism against the US dollar. This, however, is not feasible without preliminary conditions, he warned.

"(Government should) introduce a hybrid currency management system based on the Nigerian auction model: keeping 50% of all exporters from Zimbabwe's Reserve Bank by 1: 1 will ensure sufficient forex for key imports and maintain stability of prices ".

To do this, Chakravarte said the total required forex was $ 2.5 billion.

He said 50% of export earnings would be sold through the banking system on a transparent platform similar to the Nigerian "Investor and Exporter Window".

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

"Access to the platform is gradually widening by introducing priority into invisibles and capital account transactions, allowing the correct discovery of the interest rate despite the use of the fourth street, the Zimbollar index or across the border of South Africa," he said.

He said the available credits are used to normalize the availability of forex on the platform on a monthly basis.

To avoid excessive depreciation of the rest of the RTGS, Tsakravarti said a Brady-type "

"This bond can be exchanged for a certain percentage of TBs held by the banking system at 1: 1. Banks can then make it available to deposit holders who want to erase part of their other RTGS," he said.

"The new bond should be backed up with a guarantee, otherwise there is no difference between it and any other sovereign debt instrument, so a sinking capital can be created and invested in a US dollar zero coupon.

"The current price of thirty years ending in 2048 is $ 36.27 worth $ 1 billion of this bond that can be secured with the $ 360 million market today."

The US zero coupon allows investors to hold interest and principal components of bank notes and bonds as separate debt securities.

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

"This will generate $ 100 million a year to fund the sinking fund. The bond must be fully traded within Zimbabwe," he said.

University Professor of Zimbabwe University said the proposed systems would benefit Zimbabwe in many ways, such as the elimination of discretion and corruption, the correct discovery of prices in a reliable and large exchange market, the convergence of interest rates as the availability of forex is growing over time and creating a base for introducing the local currency at a later date.

Introducing the Brady-type bond with a sink fund would keep the value of the savings.

"Zimra (Zimbabwean Revenue Authority) should use the daily charges generated by the auctioning system for calculating import taxes," he said.

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

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