Every prediction has now been outdone, authorities are buffled, the populace is hopeless and unrest now seems inevitable. In recent days’ analysts and market commentators who had anticipated an about turn in the fortunes of the country, or at least the exchange rate and inflation trend to reverse, have backtracked. There seems to be no economic theory to explain the phenomena simply because in the authorities’ view, fundamentals do not justify such exorbitant exchange rate. If their testimony is anything to go by, the ready transferable deposits deduced from the broad money supply, does not support the elevated exchange rate. In their view, an exchange rate upwards of 4 cannot be sustained because there is no adequate RTGS$ supply in the system. The anticipation was therefore that the exchange rate would stabilise at between 3 and 4 but it has not. Money supply since stopped growing in January, at least in government’s words, which justifies a lower exchange rate to the prevailing rates both on the interbank and the parallel market.

So what is driving the exchange rate against these supposed facts. Either the model run by RBZ and treasury is not including the right variables to inform assumptions. Number 2, it is possible that the RBZ is understating the true level of money supply in the economy. These fears are worsened by the lack of information, previously contained in a monthly money supply report published by RBZ. The report has since been discontinued abruptly and without an explanation. The ready figures last published in January shows a telling case of new government which increased its borrowings and issuance of TBs from November 2017 up until June 2018. The total amount of TBs issued within that short of time totalled circa $2billion which was almost equal to the TBs issues between 2017 and 2018 combined. What was this money for, why the sudden jump barely a month after the power shifts, why a sudden slowdown in money supply post-elections? What was the “printed” money funding. Was it channelled to the parallel exchange to source real dollars? Were these handshakes or similar arrangements to satisfy the exercise which had been meticulously executed? Considering all this, can the nation trust that this “new dispensation” has the propensity to tame its borrowing appetite in honest given the forgone behaviour?

The only motivation for suppression of money supply levels will be to curtail an RTGS overrun. It would be in the best interest of government then to publish the money supply data so as to improve confidence levels, a factor which is widely believed to be in short supply. Transparency is one sure way of achieving this desired goal and so government could have ceased the moment to capitalise on the reported improvement in fiscus which is reducing government’s reliance on borrowing, as we are told. I hold the view that no one will be ever scared to fully liberalise the exchange market if these numbers were as true, assuming they are the only variable at play. Suppose the economy has transferable deposits totalling $1 billion and there is US$300 million in monthly forex inflows supported by an accumulating nostro position. It would follow that let to market forces, all the $1 million would be wiped out at an exchange rate of 3.3 all else being equal.

This fundamental view will hold that even if Zimbabweans have no confidence in the issuing authority and the currency, the rate simply cannot go beyond 3.3. For this to work however, legislation in terms of exchange control should be amended to improve fluidity. There should also be sizeable study into operational behaviour to ascertain demand levels of local currency by exporters, given an adjustment in exchange controls and SI on multicurrency. It is rationale for exporters sitting on huge nostros to dodge the market because little is available in terms of transparency either in broad data on money supply and even on the trades conducted on the interbank to justify participation, if anything the lag between the official exchange and the parallel exchange remains so wide. That government has an evident hand in the market through a rate cap on daily trades and that government has deliberately withheld money supply data, weighs on an already worse off negative sentiment. The ongoing funding of fuel and grains at subsidised rates to market also raises suspicion on sincerity and therefore driving the premium on the exchange rate higher. The outlook is even worse-off considering we are now anticipating a circa $3 billion to $4 billion fiscus deficit by year end.

Now what if government is sincere about the fiscus position and the monetary leg, as they have said they are. Then it follows that something outside of economic fundamentals is amiss. This variable is now widely being referred to as confidence. What is confidence and what can it do to a currency. There is a lot of literature on the impact of confidence on currencies. It however generally follows a principle that a currency with low confidence will perform worse off compared to a currency enjoying higher confidence. The dynamics will play out in such a way that holders of currency with low confidence will seek to forgo it as a way of preserving value (money as a store of value) and instead seek more of the currency which is stable. Market forces will result in exchange rate in favour of the currency enjoying more confidence at least in the short run. Confidence has a more serious impact compared to fundamentals in the short run. The impact on fundamentals such as a favourable current account will only moderate the exchange rate in the mid-term. The challenge however is that while still in the short run and crisis unfolds some businesses which have the potential to drive both the fiscus and current account will be driven out of business. By the time we get to the mid-term, so much economic value will have been lost and the economy misaligned, such that fundamentals will have effectively dampened.

Still on confidence, if the revised narrative now being proffered is anything to go about, it follows that this confidence stems from a yesteryear unreconciled factors. Losses in value in the last decade due to hyperinflation ranks the highest. Since there is no evidence of a change in government, with the same decision makers of the previous regime controlling the levers of power, the rebranding exercise has been futile. It would not have been wiser to reintroduce a local currency at this respective time. There is now credence in the need for a politically driven solution to the economic crisis, both to unlock confidence and capital. If the reformation in government is truly sincere there is no way, it can succeed without a public buy-in. The hanging legitimacy issue of the presidency is a huge premium on the country and places a bitter risk premium on Zimbabwe, even as almost half confirmed population proxy as shown by the opposition vote, have no confidence in the government dampening prospects of domestic investment. The study of economics is primarily a behavioural science which makes it complex given diversity in humans. A shared vision, achieved through reaching out and being accommodative coupled with transparency discipline and corruption tackling (real reforms) can lead Zimbabwe to the elusive promised land.

- Equity Axis News