Wednesday , March 22 2023

Currency Opportunities in Zimbabwe under Crisis


Zimbabwe recommends the introduction of a hybrid foreign exchange management system or the creation of a long-term US dollar Brady type bond to save savings by amortizing currency chaos, said well-known economist Ashok Chakrawart.


The hybrid market, according to investopedia, is a stock exchange that facilitates trade by combining an automated electronic trading platform and a traditional floor brokerage system.

Brady bonds, on the other hand, are provided with the same amount of 30-year zero coupon bonds.

Issuing countries purchase from the United States Treasury zero coupon bonds with a maturity equivalent to the individual Brady bond maturity.

Chakrawart's proposal comes at a time when dollarization has created Zimbabwe's becoming an expensive economy characterized by a persistent lack of money.

This has led to a significant surplus of foreign currency, parallel market interest rates and real-time gross settlement (RLBN) with an indefinite value of 10 billion.

As a solution, Chakravarti said that the government should introduce the local currency using monetary control and an appropriate market-based exchange mechanism against the US dollar. However, this is not possible without prerequisites, he warned.

"(The government should) introduce a hybrid forex management system based on the Nigerian auction model: saving 50% of Zimbabwe's reserve bank from all exporters at 1: 1 level will provide adequate forex to significantly import and maintain price stability," he said.

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

He said that 50% of export earnings would be sold via the banking system on a transparent platform similar to the Nigerian Investors and Exporters window.

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

"Access to the platform is gradually expanding from priority imports to invincible transactions and capital account transactions. The platform allows for the correct calculation of the exchange rate rather than using the 4th path, the Zimbollar index or across the border in South Africa," he said.

He said the available credit lines are used to mitigate the platform's availability on a monthly basis.

Chakravarti said that long-term Brady bonds could be set up to prevent excessive impairment of the RLBN balances.

"This bond can be exchanged for a TB held by a certain banking system at a level of 1: 1, after which banks can distribute them to deposit holders who want to delete some of their RTG balances," he said.

"The new bond will have to be backed by collateral, otherwise there will be no difference between it and other government debt instruments. To this end, a deposit fund can be established and invested in zero-coupon US dollar securities.

"The current price of 30 years, with a maturity of 2048, is 36.27, which means that this bond worth $ 1 billion can be secured by purchasing 360 million securities today."

The US zero coupon prospectus allows investors to hold interest and core components of government bonds and bonds as separate securities.

Chakrawart said that a 3% tax should be charged on the forex auction platform.

"It will generate $ 100 million a year to fund a sink fund. The bond should be fully sold to Zimbabwe," he said.

Zimbabwe's senior lecturer in economics said that the proposed systems could benefit Zimbabwe in many ways, such as discretionary power and corruption prevention, the proper detection of prices on a credible and large forex market, rate convergence, as the availability of forex increases over time and the basis for the introduction of the local currency later on .

The introduction of Brady-type bonds with a sink fund would save the value of savings.

"Zimra (Zimbabwe's Revenue Service) should use the daily rates generated by the auction system to calculate revenue taxes," he said.

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

Source link