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Projections ... Finance minister Mthuli Ncube wore a face shield while making mid-term budget statement in Parliament on Thursday

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Minister cornered over “broken” forex system

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FINANCE minister Mthuli Ncube (pictured) was this week quizzed over why the government was insisting on a broken forex auction system that is costing the country over US$2 billion a year amid fears the move could burden citizens with toxic debt.

Harare East member of Parliament Tendai Biti questioned Ncube’s motive in insisting on the Dutch auction system that he warned could plunge Zimbabwean citizens into further.  Economic commentators say the system is now a conduit for corruption by shelf companies.

“The Dutch auction system is costing around US$40 million a week, so the Reserve Bank of Zimbabwe (RBZ) is disbursing around US$40 million a week to finance and support the Dutch auction system.  If you multiply that by 52 weeks in a year, that brings you to around US$2 billion, which money the RBZ does not have,” Biti said.

“Only in December, this House approved the Assumption of Debt from the RBZ, of around US$3.5 billion.  Why are we maintaining a Dutch auction system that the country cannot afford and is creating indebtedness to the ordinary average Zimbabwean?” said Biti, who was the Treasury chief in the inclusive government between 2009 and 2013 asked.

“Why not simply float the Zimbabwean dollar so that there is an open market and the market will settle at a price? As I am talking to you right now, yesterday the Dutch auction system was $150 but in the supermarkets, it is now $320 and by June, the parallel rate will be 1:500.  Why not simply float the Zimbabwean dollar?’

In his response, Ncube defended the continued reliance on the system, insisting it is working.

“The gist of this question is that we cannot afford the Dutch auction system and therefore, it ought to be replaced by something else, a floating exchange rate.  We can afford the Dutch auction system,” Ncube said.

“If you have noticed in the last few weeks, what happened to the auction yesterday (Tuesday); we sold foreign currency to the tune of about US$32 million.  We have adequate resources to basically follow through with the provision of foreign currency to those who were successful in bidding for the foreign currency,” Ncube said.

He conceded that there are challenges with the system and that the payments were lagging behind.

“However, it is also correct that in the past, we have had a gap, a lag in the disbursements and that gap is being closed; it will be closed,” he said.

“What we have done in terms of the price discovery process, we have been fine-tuning it, we have noticed that – the first thing we did as the first step was to introduce the SME window.  We then followed that up last week by introducing a window through the banks on a willing-buyer, willing-seller basis up to US$1 000 through the normal banking system. 

Again, this is meant to improve our price discovery process” Ncube said.

“The auction was designed and set up to deal with the price discovery process as well as to supply the much-needed foreign currency.  The resources that he (Biti) refers to per annum that the central bank is able to outlay in terms of the foreign currency is what this economy needs and this is what is also driving this economy in terms of foreign currency requirements.”

But Biti remained unsatisfied with Ncube’s response, saying the auction was lagging behind by at least two months, forcing private businesses now resorting to the black market adding that alone was an indicator of a broken system.

 “Any importer and any person dealing with the auction will tell you that there is a time lag of nearly two months, an average of two months or eight weeks between the time when your bid is accepted on a Tuesday and the time that an actual disbursement of foreign currency is made by the RBZ,” Biti said.

“That means that the system is not coping, there is no sufficient foreign currency.  We also know that there is no sufficient foreign currency because, according to the RBZ itself, the auction system is meeting 26% of the demand.  So most businesspersons are sourcing our foreign currency on the streets at 4th Street, that is why as a result of supply and demand, the rate on the market is shooting.”

“Today, it was $320; official shops are trading at $280.  That means that the Dutch auction system is not working.  Why are you maintaining something that is not working? Just allow the floating of the exchange rate so that those who have money will get the foreign currency in the system and those who want to buy will purchase and the Zimbabwe dollar will find a fixed open market rate.  Why are you maintaining something that is broken?”

Harare North MP Rusty Markham weighed in, challenging Ncube to come clean on why he was insisting the auction system was working when payments were lagging behind.

“Can the minister explain if the auction rate is working, why are we eight weeks behind because eight weeks at US$40 million a week is US$320 million. Can the minister guarantee us or explain to us how they can clear the backlog?  Secondly, can the minister also guarantee that we will not have another RBZ debt acquisition at the end of this financial year?”

In response, Ncube said: “Basically, the backlog that you referred to will be cleared in three steps.  I can also assure you that we will not be accumulating any debt from the auction within the next three months.”

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