A NEW government-sanctioned report has exposed the yawning gap between the official and parallel market foreign currency exchange rates as the authorities make frantic efforts to tame runaway inflation.
BERNARD MPOFU
Zimbabwe is battling new price hikes triggered by the rapid depreciation of the local dollar, prompting President Emmerson Mnangagwa to send a chilling warning to the business sector.
While the government has been hyping up the efficiency of the current exchange system, a joint study conducted by the Competition and Tariff Commission and the National Competitiveness Commission showed that some local companies are now turning to the parallel market to access the greenback, resulting in the weakening of the Zimdollar.
“Liberalise the exchange rate to allow market forces to determine prices and attain efficiency. This measure is unlikely to lead to increases in prices as manufacturers’ prices are pegged in US$ and indexed to the parallel market,” the study shows.
“The market is characterised by exchange rate disparities, which are impacting on price movements on Zimbabwe dollar-denominated transactions, as the official exchange rate depreciated by 109.22% from US$1:Z$671.45 in December 2022 to US$1:Z$1 404.80 as of 16 May 2023. Meanwhile, on the parallel market the Zimbabwe dollar depreciated by 222.58% from US$1:Z$930 to about US$1:Z$3 000 as of 16 May 2023.”
Prices in Zimbabwe, the report shows, tend to be adjusted in line with the movement of the exchange rate, as businesses follow a cost recovery model.
The official rate tends to move upwards on a weekly basis on the auction market, thereby impacting on inflation developments. Ahead of his visit to Egypt, Mnangagwa threatened to crack the whip on business after accusing them of rent-seeking behaviour which he blamed for the macro-economic instability.
“The more than US$11 billion foreign exchange earned last year is the highest ever done by an economy, and is certainly far higher than in most economies in sub-Saharan Africa, outside South Africa. Sadly, this has not translated into a stable exchange rate,” Mnangagwa wrote in his weekly column published in the state-run Sunday Mail.
“Above all, short circuiting set rules and cutting corners in business will attract very stiff sanction. Those who break our exchange control rules, or who money launder, will only have themselves to blame . . . We will take all measures necessary to ensure there is stability, including painful ones should that ever become necessary.”
The Confederation of Zimbabwe Industries (CZI), the country’s organised manufacturing sector lobby group, says confidence-building measures are key to macro-economic stability.
“The current shocks in the parallel market are expected to take a while to ebb, especially with respect to ZWL$ inflation,” reads a CZI Inflation and Currency research note for April.
“However, the blended inflation rate is expected to continue to shield the impact, as the USD prices are stable and even going down for some products. The increase in ZWL$ inflation by double digit levels implies that the originally envisaged inflation policy path with respect to ZWL$ inflation is now off rails.
“Unless some drastic policy measures are introduced, which would create some demand for the ocal currency, such as having some tax heads paid exclusively in ZWL$, there will be no demand for the local currency. Although excess ZWL$ liquidity could be mopped through the digital gold tokens, as well as the physical gold coins, this will not help create demand for the local currency which is needed for its stability.”
An association of retailers sympathetic to government said an investigation on local firms abusing the foreign exchange system should be launched.
“Confederation of Zimbabwe Retailers (CZR) also notes with disdain the unjustified attacks on the Foreign Currency Auction system which has for a long period availed cheaper foreign currency to companies for retooling and purchase of raw materials among others,” Denford Mutashu, the CZR president, said in a statement.
“It is also critical for the government to set up an inter-agency committee to investigate companies that accessed forex and make each one of them account for the last dollar.
“The on-going government and private sector dialogue to remove impediments to the doing business environment is highly commendable as the goal is to protect consumer and business sustainability.”
