Just to reiterate what we said in an early article, a lot of people were left confused by the press conference held yesterday by the Finance Ministry. One of the confusing things to come out of it was the final measure meant to shoar about the Zimbabwean dollar. In it the RBZ promises that they will be introducing a new Forward Market for foreign currency soon. What the heck is a Forward Market? Is this going to be a big deal? Will it be something the ordinary Zimbabwean be interested in?
First, let us recap what the Finance masters had to say:
Foward Market to Foreign Currency
Having noted the widespread use of forward pricing in foreign exchange by the some economic agents, the MPC resolved that mechanisms to formalise forwards pricing arrangements should be created through the development of a market for forward exchange rates. The approprite measures in this regards will be announced in due course.
John P Mangudya
27 June 2022
So what is a forward market?
Generally, a forward market is a market which handles forward contracts. A forward contract often just called forward, is a contract agreement to buy or sell an asset at a specific price on a specified date in the future. So a forward market is just a fancy way of describing what businesses do on a regular basis. They enter into contracts to deliver certain things at specified dates several days, weeks or hours into the future. Normally determining the price/cost to be used in such deals is easy if you are using a stable currency.
The Zimbabwean dollar is anything but stable and so since businesses in Zimbabwe are often forced to use it whenever they make deals that will be executed in the future they often come up with a mechanism to account for any possible future loss in value in the Zimbabwean dollar. So when you enter into a contract to buy beans at a future specific ZWL value you are entering into a forward contract. All Mthuli Ncube is saying is that they need to formalise this. That is much ado about nothing if you ask me.
By their nature forward markets are an informal and private arrangement between two businesses. Formalising them is nothing to write home about. All you are likely to achieve is that we will see derivatives being traded on something like the ZMX (Zimbabwe Commodities Exchange).