(HERALD) Forex reforms remove price distortions
Forex reforms remove price distortionsTHE huge liberalisation and simplification of the foreign currency markets announced yesterday, and the effective creation of a single market-driven exchange rate for almost all commercial transactions, remove at a stroke many business constraints and end many of the damaging business distortions.
The first prong of the strategy is to encourage exports and start creating a bigger pool of foreign currency to meet imports.
For several years, exporters have, in effect, been severely taxed, being forced to sell a significant portion of their earnings at well below purchasing power parity. This has made too many a lot less competitive than they should have been.
Now they will sell the required portion of their earnings, plus what is left of the rest once they have bought their own imported inputs, at the market-related interbank rate.
Since, at least while exports build up, demand for currency on the interbank system is likely to continue to exceed supply, this should amount to a bonus for exporters.
The second prong will remove many distortions in the economy and allow the true cost of many things to be seen at a glance, simply by ending what amounted to a multiplicity of exchange rates.
For example, the almost continuous debate between authorities and the gold and tobacco producers over support prices should end.
These groups sell their final product at world prices for US dollars and the interbank rate will tell them how many Zimbabwe dollars they get.
The only question to settle, and it is not the major one, is what they can be paid into their FCA accounts to buy critical inputs.
Even producer prices for most crops can now be worked out in minutes.
The world price for the crop, plus the transport costs of imports, converted at the interbank rate will give a ceiling beyond which imports will be cheaper.
But we are willing to bet that most Zimbabwean farmers will be able to produce at well below that figure so encouraging local production.
The change means that everyone can now do the sums and see at a glance how big a potential gap is, which can be a profit.
The creation of a single commercial exchange rate should also end many of the fundamental disputes between producers and the National Incomes and Pricing Commission when it comes to calculating costs.
In fact, with everything out in the open, NIPC can now move towards the desirable goal of setting formulas rather than approving each price and each price rise.
Monitoring will probably be sufficiently simple that cheating can be easily detected, which means that there will be no cheating.
The third prong is to ensure that export earnings are channelled first to essential imports and to productive uses.
Luxuries and "trinkets" do not get priority and have to stand in line until the needed imports have been paid for.
Zimbabwean industrialists have been complaining, legitimately, that they cannot produce when they cannot buy certain raw materials.
With most export earnings now going to the interbank system, and available at a market price to all, that can end.
Inefficient producers have been weeded out in the last decade of economic troubles, so the survivors, and the new industries that will not be viable, can climb in and start producing.
The change will mean the fiscal authorities, in effect the Government, will need to return to certain fundamentals to implement their priorities and programmes.
Duty values will have to be set at the new interbank commercial rate, if they are to make sense both as revenue earners and as a way of encouraging local production and discouraging unnecessary imports.
With mining earnings now being available at full value, taxation policies will need to be adjusted to encourage desirable investment.
In effect, the liberalisation announced yesterday should accelerate the transition away from a "dealers" economy towards a "producers" economy.
And that allows the attack on inflation to be launched from a secure base.
posted by MrK @ 8:58 PM
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