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Govt fears currency crisis may trigger social uprising

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PRESIDENT Emmerson Mnangagwa’s government is intensifying its sweeping crackdown on foreign currency traders in the volatile market amid growing fears of an exchange rate-driven economic meltdown, The NewsHawks has established.

BERNARD MPOFU

Security sources say on top of ongoing arrests, the authorities want more dealers arraigned in a bid to prevent further foriegn exchange market chaos, an economic contagion and political unrest that may lead to popular uprising.

“We have already arrested a number of foreign currency dealers. More arrests are coming. We will deal with them,” a source said.

“Some traders and senior corporate executives will spend Christmas in jail.” This comes as it has emerged this week that the clampdown is a coordinated and systematic campaign involving the Central Intelligence Organisation (CIO) and security agencies, the Reserve Bank of Zimbabwe, especially its Financial Intelligence Unit (FIU) and the ministry of Finance.

Political leaders, particularly Vice-President Constantino Chiwenga, have been on the offensive, using the Zimbabwe dollar, which is fast depreciating in relation to base currencies in the market, as a pretext. Chiwenga has warned of harsh measures against traders.

Security sources say the crackdown is a culmination of a series of meetings and investigations by the authorities and security teams into what has been happening in the foreign exchange market and the economy of late.

This involved a security threat analysis of the situation on the ground by the CIO and other key intelligence services that concluded that the exchange rate issue poses a clear and present danger to Mnangagwa and his government.

“This is a coordinated government operation which involves the ministry of Finance, RBZ and CIO to contain the recent currency crisis,” a source said.

“It will be running for some weeks and may further be extended for some months. Government wants to crush the illegal traders driving the rate spiralling out of control. “Authorities fear that an uncontrolled exchange rate crash might have serious contagion, by spreading into an economic crisis from the currency collapse.”

Fiscal and monetary authorities, led by the FIU, and capital market regulators, are currently tightening forex trading regulations by adopting a tight monetary policy in a bid to weed out what they variously describe as “saboteurs” and “fraudsters” in the market who are destroying the economy.

 Authorities say illegal forex trading is sabotaging the economy and will trigger inflation, while weakening the local currency. Zimbabwean authorities are scared of a repeat of the 2008 situation.

Analysts say given the weak economic fundamentals and increased money supply, mainly through infrastructure projects, this currency crisis was predictable and may scale 2008 heights unless quickly contained.

While exchange rate volatility can be attributed to a combination of complex issues, it can be caused by fiscal and monetary authorities’ actions, investors, central banks, confidence crisis or a combination of actors and factors.

Yet the result is always the same: A negative outlook causes wide-scale economic damage, inflation and a loss of capital.

Some of the manifestations and causes of a currency crisis include:

  • Dramatic decline in the value of a currency, which causes negative ripple effects throughout the economy;
  •  It is not an intended policy measure like devaluation, but a depreciation due to market forces, laws of demand and supply;
  •  Generally any increase in money supply could lead to a depreciation in the exchange rate. This is for two main reasons: Inflation — Everything else being equal, an increase in the money supply is likely to be inflationary. This is because with more currency chasing the same quantity of goods, firms will respond by increasing prices.

Alternatively, if expansionary monetary policy involves cutting interest rates — lower interest rates will tend to increase aggregate demand, leading to possible inflationary pressure; and

  •  Fiscal and monetary authorities may intervene to help stabilise a currency by selling off reserves of foreign currency or gold, or by intervening in the forex markets. In this case, they have intervened through law-and-order measures.

Currency crisis

A currency crisis is triggered a sharp decline in the value of a country’s currency. This loss of value, in turn, negatively affects an economy by creating exchange rate instability.

 A currency crisis is usually a reflection of unstable economic fundamentals, structural issues and policy failures underlying the currency. In other words, a currency crisis is often the symptom and not the disease of greater economic malaise.

Combating the crisis

Central banks are the first line of defence in maintaining the stability of a currency. In a fixed exchange rate regime, central banks can try to maintain the current fixed exchange rate peg by dipping into the country’s foreign reserves, or intervening in the foreign exchange markets when faced with the prospect of a currency crisis for a floating-rate currency regime. In this, the government has adopted a law-and-order approach and a tight monetary policy intervention to shrink money supply to fend off a looming currency crisis.

Anatomy of a crisis

 Confidence is a major issue in a currency crisis. If investors lack confidence, they can often withdraw their money en masse and that erosion in confidence of an economy’s stability can destabilise the foreign exchange market and exchange rate.

Once investors sell their domestic currency-denominated investments, which amounts to capital flight, they convert those investments into foreign currency. That causes the exchange rate to get even worse, resulting in a run on the currency, which can then make it nearly impossible for the country to finance its capital spending and manage its finances.

 The authorities say illegal forex trading is sabotaging the economy. However, analysts say a repressive approach to markets — through arrests and intimidation — will not address the economic problem that is deeply entrenched, complex and has many complicated dimensions and dynamics, including the government’s own activities that fuel the black market.

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