Harare – According to Reserve Bank of Zimbabwe Governor Dr. John Mangudya, the dramatic rise in parallel foreign currency exchange rates is indicative of a bubble as it appears to lack any fundamental foundation and could result in an economic depression.
Since the interbank foreign currency market was created last February, parallel market rates have remained ahead of the official rate.
Although the interbank rate remained stable at 25 to the US dollar, parallel market rates are about 60-68 to the dollar.
Bubbles are described by a bid-up of an asset price over and above any legit, sustainable value. So when the bubble “bursts” price levels crash, demand drops, and the result is sometimes a reduction in business and household spending and possible economic deterioration.
Dr. Mangudya said that there are no economic fundamentals to illustrate the parallel spike in rates.
He said the parallel rate jump was merely over-speculative behavior. ” What we have in Zimbabwe is behavioral economics, it’s not about any economic fundamentals. We need to understand why people are behaving the way they are. And that behavior is what we need to deal with as a country. ”
“If we don’t do what the Financial Intelligence Unit (FIU) is doing we are going to reach a bubble. What we are doing at FIU is to try and stop it, but mobile telecommunications players are just looking at their income, not the economic welfare of the country,” he told the Budget and Finance Committee last week in Parliament.
The asset market theory of exchange rate determination indicates that exchange rates are driven mainly by the advancement of macroeconomic fundamentals and that foreign-exchange market players establish rational expectations for future developments in exchange rates and that exchange rates are defined in efficient markets.
The RBZ governor asserts that when it comes to the parallel market this is not the scenario.
“It does not take much to move the parallel market rate. US$10 000 can just exchange a few hands at a different rate, and the rate will go up,” he said.
The apex bank is currently engulfed in a court battle with Econet Wireless Zimbabwe over the former ‘s move to freeze the lines of highlighted mobile agents.
Behavioral economics examines the effects on the decisions of individuals and institutions of psychological, cognitive, emotional, cultural, and social factors, and how those decisions differ from those assumed by classical economic theory.
Experts of behavioral economics say that the actual behavior of people deviates from the optimal of economic rationality for at least two reasons: first, decisions are generally based on an imperfect basis of information and, second, the processing of information by humans is limited by their computational abilities.
And as a result of these ‘constraints’ people are forced to apply mechanisms of simplification to information processing.
According to a report in The Herald, the RBZ governor pointed out that in order to break the network of illegal foreign currency dealers, the move to impose a blanket freeze on suspect accounts was crucial.
The bank previously suspended isolated accounts or financial entities that would have been flagged for manipulation of foreign currency.
” Economic agents in Zimbabwe have a lot of indiscipline and they are putting Zimbabwe’s economy in danger.
“The rising rates are threatening the welfare of the majority,” he said.
Consumers, Producers, and/or influencers of capital markets and the economy at large are typical economic agents.
Houses or individuals, firms, governments, and central banks are the four major economic agents.
“We tried isolating the bad apples, such as Cash24, but the rates would go down for a while. But then another operator would come up and push up the rates.
A few observers said the current rigid official rate of 25 to the US dollar gave the parallel forex market an impetus. As a move to help contain inflationary pressures during the Covid-19 pandemic, Zimbabwe’s monetary authorities moved from a floating exchange rate to nail the official rate at 25 in March.
But the firm has said that the fixed exchange rate is unsustainable.