A responsible approach

The arguments range from claims that the present managed float is not working and there is need for more flexibility, to expressions of a need for a more realistic exchange rate since failure to do so would lead to stagnation in investment and capital flight.

It was advanced that a depreciated currency would help our exporters and manufacturers to be more competitive, assist manufacturers to compete locally with imported products and generally dampen the current demand for foreign exchange.

What really is the problem? The simple answer is shortage of supply of foreign currency. How then do we address this and how does change in the price for foreign currency by allowing the local currency to depreciate, help this situation? Once there is a depreciation then the price of all imported items will go up in the local market and, among other things, this will cause food inflation and cost-of-living challenges for the most vulnerable.

All fixed-income earners and pensioners will experience a fall in their purchasing power and standard of living.

Is allowing a depreciation the only solution? The answer is no.

And here the Minister of Finance and the Central Bank Governor are to be complimented in the strategy they appear to have adopted: firstly, the Central Bank while allowing the local currency to depreciate very slowly and not dramatically or to the magnitude as suggested by some. Remember the problem is shortage of foreign currency caused by falling production of oil and gas, international price of both commodities, and the 100 percent write-off of investment in the year that it is made. The latter would reduce the level of taxes paid and so reduce the foreign currency paid in taxes to the Government.

Clearly the Central Bank Governor would see the whole picture and would not have considered modelling the response to a dramatic devaluation in the best interest of the economy. How does anyone justify a depreciation of 18.5 percent while sitting on US$9.4 billion in reserves and another US$5.25 billion in the Heritage and Stabilisation Fund.

More importantly, there is a failure to realise that the fiscal authority has taken the lead and not left correcting the imbalance in the foreign exchange market to the monetary authority.

We have seen that the Minister of Finance has abandoned the flat 25 per cent tax policy and introduced a second category by imposing a 30 per cent tax on individuals and companies earning income of more than $1 million a year. He has also imposed a seven per cent tax on online purchases and signalled implementation of the long-awaited property tax regime.

Additionally, the 50 per cent increase in customs duty and motor vehicle tax on luxury vehicles would curtail demand for these items. This has allowed fiscal policy to reduce aggregate demand for foreign exchange rather than exchange rate adjustments, the use of higher interest rates and/or a wages policy for foreign exchange demand management.

We expect with the new gas fields coming on stream, and if prices firm a bit, the net benefit would be a sizeable increase in foreign currency coming into the foreign exchange market and being added to the reserves at the Central Bank.

Surely this approach/analysis by the authorities appear to be sound and far more balanced, one that is also people friendly, less corrosive to the economy and a responsible one.