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How to price the Zimbabwe risk

If a lack of confidence is the main cause of the forex cash shortage and the massive discounts to RTGS, then more confidence is the solution.

Each time the invisible hand feels arm-twisted by policy makers it knee jerks swinging to extremes.

Such is the case in the currency market.

Granted, government accepts that we have three currencies and allow them to trade freely, the discount to US dollar will moderate and settle for a rate that is much smaller than prevailing on informal market.

By outlawing this currency market government is creating a pricing vacuum which media and informal traders are happy to occupy – however informed they are.

As currency trading is pushed into the grey area, policy makers are inadvertently responsible for paving way for the large discounts we see today.

If banks, shops and bureau de changes are all allowed to freely trade bond notes, RTGS and forex at market related rates, US dollars will eventually move off streets and back into official markets.

More important, a drying in foreign investment in the economy emanates from a worry that an investor will not be able to retrieve his US dollar investment down the road.

That lack of currency certainty is a stronger push force than high returns in Zimbabwe are a pull force.

With a predictable market where banks and funds can market-make the demand and supply of different currencies, foreign investors can be comfortable to invest their dollars at a premium knowing there will be a fair market to convert their RTGS back into US dollars when need be.

The answer lies not in some unconventional monetary thinking but in returning to that simple faith in the power of the invisible hand – the market.

 

By Ray Chipendo- The Source

 

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