Zimbabwe’s largest industrial lobby group, Confederation of Zimbabwe Industry (CZI), has demanded a “truly” floating foreign exchange rate to improve foreign currency trading on the interbank market as well as its availability in order to ease the effect of parallel market rate premiums on prices.
Recently, Finance and Economic Development Minister Professor Mthuli Ncube while speaking at the Zimbabwe International Trade Fair (ZITF), said the wave of price increases by the majority of local businesses and the wild parallel market exchange rates, had no economic justification.
The Treasury chief argued that Government had successfully managed to stabilise fundamental fiscal elements, essentially money supply growth and unbudgeted expenditures, which previously fuelled inflation. In fact, the minister said Treasury was recording positive income variances and surpluses. The finance minister decried the level of indiscipline in the market in relation to galloping prices, which he said thrived on speculative sentiments and bad economic practices that have poisoned the entire economic environment.
Commenting on the exchange rate issues, the Reserve Bank of Zimbabwe (RBZ) said the foreign exchange rate on the interbank market, which the RBZ introduced through the monetary policy of February 22, was freely floating, market-based and moving towards convergence with the black market rate.
Zimbabwe has witnessed heart rending price increases, in the middle of declining consumer spending power, since the Reserve Bank floated the exchange in February while also abandoning the 1 to 1 parity between the US dollar and local forms of currency, namely bond notes and coins and electronic payments.
Prices of most goods and services have shot through the roof after increasing by an average of 75 percent over the last few months with the trend notable across leading retailers and wholesalers in the country as well as informal traders, in sync with black market foreign exchange rate movements.
CZI president Mr Sifelani Jabangwe told our sister paper Business Weekly that rampaging parallel market rates, were behind the incessant price increases rattling the economy, as trading on the interbank remains subdued.
While the interbank market rate has crept up from its starting level of 2,5 to the greenback in February this year, it remains significantly lower than the illegal market rate. The Reserve Bank of Zimbabwe listed the interbank exchange rate at RTGS$3,26 against a unit of the US dollar yesterday.
Prices of goods first started on a fast upward trajectory when the RBZ ordered banks to separate Real Time Gross Settlement (RTGS) funds and amounts held in foreign currency accounts saying that inter-mingling the currencies was discouraging inflows of the much sought after foreign currency.
CZI’s call comes as importers keep struggling to obtain adequate foreign currency on the interbank market, which analysts and policy makers believed would be the panacea to the shortage of foreign currency in the country, amid growing pressures on prices emanating from foreign currency premiums.
Previously, the central bank made allocations of foreign currency for key imports such as fuel, electricity, medicines and drugs, wheat and cooking oil before it liberalised procurement of forex through the interbank; except for essentials like fuel and medicines, which it continue to cater for.
Mr Jabangwe said if the exchange rate was “truly” “freely” floating and trade in the currency was being conducted independently on a willing buyer, willing seller basis, there would not be acute shortage of forex on the market, which is feeding the frenzy on the black market as firms battle to remain open.
The CZI leader said the prevailing situation has left firms without option but to use the parallel market to procure the foreign currency they need to import critical inputs such as raw materials and machinery, the cost of which the businesses factor into their pricing and reflected in rising prices.
“All we know is that the price increases are aligned to the foreign exchange rates, particularly the black market and at the moment the interbank market has not been providing any foreign currency and this has put pressure on the black market (exchange rate).
“The black market has been moving upwards and the absence of currency from sellers, who are not happy with exchange rate, the amount of money available to chase with local currency is actually very low. So the black market is what has been driving the prices.”
Mr Jabangwe said it was critical that Government and business discussed reasons behind the continuous upsurge of the parallel market rate when the expectation was that it should by now be softening.
“This is because it actually has a lot to do with policy and when we speak to exporters (holders of foreign currency), they are not happy about the exchange rate on the interbank market, so we are not seeing currency coming onto there. Anyone selling is not selling at a rate they are happy with,” Mr Jabangwe said.
The CZI president said discussions were ongoing between business leaders and the Government to unravel challenges around the issues of skyrocketing prices of basic goods in the country.
Responding to question over operations of the interbank market, RBZ governor Dr John Mangudya said the interbank market foreign exchange rate was moving towards convergence with parallel market exchange rates. The governor said even with the monetary policy position compelling prescribed holders of foreign currency to liquidate their export earnings at ruling rate after 30 days, the issue of liquidity on the market boiled down to agreement between the seller and the buyer on the right market price.
“The exchange rate is all about buyers and sellers of foreign currency finding each other and agreeing on the exchange rate through their banks; the exporter advices the bank what sort of buyer it wants and the bank looks for buyers.
“The interbank market is improving; that is why we are having these questions (about interbank market not working effectively); this is why we are having this discussion. “The market is moving towards convergence and equilibrium position. The issue is all about the price (exchange rate),” Dr Mangudya said.
The RBZ chief said the apex bank will come in with interventions in terms of influencing the level it believes the rate should be when it starts drawing down on external lines of credit it is negotiating and inflows from tobacco sales reach their peak.