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Mixed feelings on forex committee
Shame Makoshori, The Independent (Zimbabwe)
January 05, 2007

http://www.theindependent.co.zw/viewinfo.cfm?linkid=12&id=9663

ECONOMIC analysts have expressed mixed feelings over calls for the country to set up a foreign currency allocation committee to oversee the management of Zimbabwe's scarce foreign currency resources.

While saying that it was imperative for Zimbabwe to set up proper structures to supervise the allocation of foreign currency, the analysts said capable individuals should be appointed to run such a committee if they were set up.

If set up, a foreign currency allocation committee would be expected to increase transparency and accountability in the way the Reserve Bank of Zimbabwe (RBZ) manages foreign currency, proponents of the committee have argued.

Independent economist, John Robertson, warned that there was a risk of the committee putting stringent controls on the exchange rate, overvaluing the local currency in the process.

"Market forces should be allowed to determine the exchange rate. But a foreign currency allocation committee would determine the exchange — the exchange rate must not be regulated," Robertson said.

University of Zimbabwe graduate school of management lecturer, Isaac Kwesu, said he did not see anything wrong with setting up structures to help the RBZ rationalise the allocation of foreign currency.

"We always need proper structures for the accountable allocation of scarce resources," he said.

"Foreign currency allocation committees are there even in developed countries where market forces determine the exchange rates. The problem arises if there are too many controls imposed by the committees. That (will) end up distorting the market," Kwesu said.

He said the United States and Japan had successful foreign currency management committees that worked hand-in-hand with their central banks.

Zimbabwe is currently going through its worst economic crisis in history, characterised mainly by acute foreign currency shortages that have forced the central bank into shifting exchange rate policies since Gideon Gono took over as the central bank governor in 2003.

The RBZ re-introduced the interbank system in October 2005 after experimenting with the auction system which it adopted in January 2004.

The auction system was meant to restore stability in the foreign exchange market which has been overtaken by the parallel market.

While the exchange rate on the auction system was allowed to adjust periodically, critics said it had been of little benefit to exporters because the adjustments were not realistic and did not allow exporters to break even.

As a result, export receipts had not improved as anticipated under the auction system.

In re-introducing the interbank trading system, RBZ governor Gono said he wanted to promote the "allocative efficiencies in the foreign exchange market".

Under this system, all exporters retain 70% of their export proceeds in foreign currency accounts and sell the remainder at the auction exchange rate run by the central bank at determined rates.

Exporters can now sell the foreign currency held in their accounts through authorised dealers.

There has been little sign that the major thrust of the RBZ's policy — encouraging export viability and therefore a boost in foreign currency receipts — has given any life to the troubled currency market.

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