malvernmugadzikwa
Oliver Kazunga
CONVERGENCE of the official and parallel market exchange rates will kill the black market and the forex auction system further allowing businesses to generate foreign currency through their sales and the internank platform.
Economic analysts see the official and parallel market exchange rates converging soon as premiums have significantly continued to fall since the Reserve Bank of Zimbabwe and fiscal authorities introduced policy measures to stabilise the exchange rate and taming runaway inflation.
Inflation and the exchange rate have predominantly been stable since the Government intensified interventions to squeeze excess liquidity from the market with local currency appreciating against the US dollar on the black market while inflation is slowing down.
Zimbabwe’s year-on-year inflation last month stood at 280,40 percent while the month-on-month figure stood at 3,4 percent.
In the last MPC statement released on September 23, 2022, RBZ indicated that the foreign exchange rate premium has significantly declined from an elevated level of 140 percent in May 2022 to current levels of between 5 percent and 15 percent.
This, the monetary authority said, is consistent with regional and international norms.
“This positive development on the exchange rate front is envisaged to go a long way in eliminating arbitrage opportunities which were fueling forward pricing models and hence fomenting adverse inflation and exchange rate expectations,” it said.
In separate interviews, economic commentators concurred that if convergence of the rates occurs for a prolonged period of time, this will certainly kill the black market and the auction system while allowing businesses to meet their foreign currency requirements through sales and the willing buyer-willing seller platform.
Economist, Professor Gift Mugano, said the auction system was on its way out not by default but by Government design as authorities have made a deliberate decision for the economy to use the willing buyer-willing seller exchange rate.
“The auction system is already on its way out not by mistake but by Government design because sometime way back in April Government made a decision to introduce the willing buyer-willing seller.
“In May, the President through extraordinary policy measures which he announced, he then also made the pronouncement that the official exchange rate which must now be used is the willing buyer-willing seller rate.
“So, the Government cannot have two official markets for the exchange rate.
“I guess that there is a step by step exit of the auction system and this is answered by the convergence of the exchange rate.
“Once we have convergence of the black market and official exchange rates, it means black market and the auction system are going to die,” he said.
Mugano said the country was repealing the auction exchange rate through the promulgation of SI 118 of 2022 which sanitises the willing buyer-willing seller exchange rate.
“Also when you look at how much money the auction system is allocating to companies, the figure has reduced from an average of US$42 million per week and now about US$10 million a week.
“This also tells you that its (auction system) relevance is going as two things are happening there; companies are getting money from the willing buyer-willing seller in a way of course it’s not a lot of money, and also getting their foreign currency through sales which is a significant source of foreign currency,” he said.
At this week’s auction, about US$11 million was allocated to businesses who bid at both the main auction and the Small-to-Medium Enterprises auction.
Mugano said authorities have been closing the taps that were causing exchange rate disparity, and one of the taps is around the procurement system of the Government which has been abused.
“And we have seen the Government setting up the value for money unit, which is commendable but it’s not sustainable. The most sustainable and effective way of guaranteeing stability and closing the gap is to have a market-led economy which the President underscored when he was being inaugurated in November 2017.
He said a market-led economy should be characterised by limited Government involvement in production, particularly in agriculture.
“You are aware that our current agriculture model is funded by the Government and the Government’s input support scheme has been abused. The Government’s vision and view is very clear that they want to enhance production and break the market failures of Regions 4 and 5.
“But I think we have a practical example in tobacco, the crop is funded by the value chain and we need the same in grain or cereal and last year the Government moved a step to set up a commodity exchange, and the Minister of Finance has emphasised that the commodity exchange is going to be a critical player in financing the marketing of agricultural commodities, that is the direction which we must take,” said Mugano.
However, RBZ governor Dr John Mangudya recently indicated that the auction will be maintained for longer after he described it as the most “transparent system” to sell foreign currency.
“The auction system is a more transparent system for making forex available to the market,” he said.
The Zimbabwe National Chamber of Commerce past president, Trust Chikohora said: “The auction is still needed for now as a means of allocating foreign currency because there are not many big exporters in the market.
“The few big exporters may not sell their money on the interbank market and so there is still a need for the surrender requirements, which funds are then allocated to the market at the auction.”
Economist, Persistence Gwanyanya, who is also a member of the RBZ Monetary Policy Committee, said the convergence of the exchange rate would mean that the pressure for the US$ in the market is eased.
“Even pressure for paying wages in US$ by businesses is going to be eased; inflation itself is going to be managed down and the possibility of arbitrage opportunities is going to go away, so as parallel market activities while orderliness in the broader macro-economic environment will be restored promoting productivity in the economy,” he said, adding that authorities expect to see trades at the auction system slowly easing where forex will be availed through the interbank market.
He said the interbank market is a spot market where foreign currency under a normal economy will be sufficient to support the needs of the productive sector.
“The interbank market is a spot market where one gets the foreign currency as it is paid immediately unlike the auction platform. We want to move away from the auction system to the interbank.”
An economic analyst Gertrude Tapambwa said the obtaining economic climate as a result of the interventions authorities have in the past been implementing, was welcome and encouraging.
“However, what remains to be seen when the rates converge over a prolonged period of time is sustained availability and accessibility of forex from the interbank market,” she said.
Bongani Ndlovu