Exchange rates head for convergence: CZI

Golden Sibanda

Senior Business Reporter

Zimbabwe is slowly heading towards convergence of the official and parallel market exchange rates, as premiums between the US dollar and local currency fall, industry has said in a research note.

With the formal or auction rate drifting from $73 to round about $76 to the greenback, the hugely positive measures taken by the central bank to protect the local currency, have seen the black market rate glued at US$1 to $90-95 for over five weeks now.

Industrialists have, however, warned against the potential risk of money supply growth, excessive Government expenditure (including salaries), the Covid-19 pandemic, inflation and drifting too deep back into multicurrency, on rate stability.

The Zimbabwe dollar, which has taken heavy battering and lost significant value against the greenback since being reintroduced last year, has only seen gradual and modest depreciation since the foreign exchange auction was introduced in June.

Exponential depreciation of the domestic currency, reintroduced last year after a 10-year hiatus, resulted in sky-rocketing inflation, which shot up from 5,39 percent in October 2018 to 785,6 percent by June 2020.

This had reignited genuine fears of a potential relapse into similar economic malaise that caused record inflation in the decade to 2008, which peaked at 231 million at the last official count in August that year.

The obtaining situation comes against the backdrop of dependency on imports due to constrained production, which has invited unbearable and sustained pressure on the exchange rate of the domestic unit.

But Zimbabwe dollar exchange rate only recorded its most significant upward jump from $25 to US$1 at the inaugural forex auction of the Reserve Bank of Zimbabwe (RBZ) on June 23, to $53 to US$1, after which four successive auction trading sessions saw only marginal declines.

The Confederation of Zimbabwe Industries (CZI) said after the fixed rate regime was replaced with the auction system, the gap between formal and open markets rates started reducing.

“Before the fixed exchange rate regime was dumped, the premium between the official rate and the non-official rate was surging, on June 19, the interbank fixed rate was at US$1:$25, while parallel market rate was approximately US$1:$112.

“Since the introduction of the foreign exchange auction market, the parallel rate has shown signs of relenting and the auction rate is depreciating — a good indication that convergence is possible,” CZI said.

Prices have started adjusting to the auction market exchange rate, albeit slowly as prices are usually sticky downwards. A fixed rate regime was temporarily adopted in March for certainty of pricing after the coronavirus outbreak.

It however, quickly became sub-economic once the gap between the formal and parallel market rate became more pronounced, prompting authorities to adopt the auction system, which has been a huge success thus far, helping stabilise the rate and prices.

Nevertheless, CZI noted, there are mixed reactions from industry as some may still be hedging, but the feedback from market players is that they are beginning to blend out the old rates with the emerging auction rates and reducing prices.

“There are indications in the 2020 Mid-term fiscal policy that authorities will allow the currency auction to operate efficiently by zero recourse to (central) bank financing of budget deficit and avoiding fiscal slippages at all costs,” CZI said.

The forex auction market has fostered market-led price discovery and better access to hard currency by genuine importers for essentials that include raw materials and equipment, lifting pressure off open market rates.

To complement the auction, which replaced the uneconomic and market disliked fixed rate regime and ineffective interbank, the central bank has tightened screws on liquidity, including restrictions on mobile money agents that were fuelling illegal and speculative forex trading.

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