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Volatile exchange rate symptom of mistrust

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THE volatile parallel market exchange rate being experienced in the country is a manifestation of deeprooted mistrust and lack of confidence in the monetary policy, as well as an increase in money supply through the payment of contractors and farmers, as well as a malfunctioning and rigged forex auction system.

DUMISANI NYONI

Analysts are urging the authorities to depoliticise economic decisions.

Zimbabwe, which re-introduced the local currency in 2019, is experiencing serious volatility in the parallel market exchange rates which have adversely affected economic growth by creating business uncertainty, as well as increasing domestic prices.

There are four exchange rates one meets when transacting goods and services: the official auction exchange rate (ZW$88.55: US$1); swipe to US$ (ZW$180 to US$1; mobile money to US$ (ZW$200 to US$$1) and cash to US$ (ZW$165 to US$$1).

Economic analysts, labour, industry bodies and business leaders say the parallel market exchange rate volatility mirrors the lack of trust and confidence in the market.

To preserve value, Zimbabweans are seeking to invest in property or buy US dollars, which they keep outside the banking system, because of lack of confidence in the local currency.

“It’s a dilemma that Zimbabwe is going through cycles of potential hyperinflation in a period of under two decades. Because of the legacy issues, there is no sane Zimbabwean who is going to trust the Zimbabwe dollar no matter how much temporary stability we will attain. So there are two things that the Zimbabwe government can never buy: confidence and trust,” CEO Africa Roundtable chairperson Oswell Bimha said.

“So it means people know that they have lost value somehow and others are still reeling from the effects of that loss of value. So whatever happens, somebody tries to get where they will get the best value saving as far as possible.

“Two, somebody tries to keep their value to themselves. It means you will not take your money into the bank. Three, that’s why you see this whole accommodation, it’s amazing how Zimbabwe is investing in housing, 99% of them fully paid for.

“It means people are trying to lock value. What does it mean? It means you have no savings culture in the economy. It means you then lose, all deposits you get are transitory, they are transitory deposits. They come and go. That is a manifestation of a deeprooted confidence and trust in the monetary system of this country.”

Economic analyst and academic Stevenson Dhlamini cited an increase in money supply, payment of farmers and contractors as major drivers of parallel market rates.

“A lot of money recently was created and that has increased the money supply. Secondly, it’s the delay in the disbursement of bids in the (forex) auction system. Inflation is just going up and it’s pushing the black market to also increase their premiums. They take advantage of that,” he said.

“There is also decreasing faith in the Zimbabwe dollar. People are now preferring the US dollar to the Zimbabwe dollar because of price instability. The decrease in exports and that’s why the auction system is not having sufficient foreign exchange.

“The auction system is not adhering to the forces of demand and supply. There are some elements of tampering with the pricing. So the auction system is compromised in its stability to find the true value of the currency. That’s also pushing people to the black market. If only they can clear that backlog and avail auction forex on time and stop interfering with the true price of the US  dollar within the auction system, we might have an element of sanity there.”

Confederation of Zimbabwe Retailers (CZR) president Denford Mutashu said currency volatility has created confusion on the market and extreme cases were when the supplier or manufacturer, tuckshop or wholesaler flatly refuses any other payment for goods and services except USD dollars cash, which comes with sweet discounts to entice the retailer or wholesaler.

Mutashu said unfortunately most formal retail and wholesale players have seen their US dollar cash sales decline to less than 5% of total daily or periodic sales.

“This creates an unfair advantage as one is forced to compete with those that exclusively sell in US dollars directly to customers. The preference for US dollars by suppliers is informed by the need to augment forex sources after getting an average 30% of foreign currency requirements from the auction market,” he said.

“There has been an increase in demand for US dollar cash payment for goods and services in the general economy, from rentals, fuel, utilities and salaries,” he said.

As the economy opened after successive Covid-19 Level Four lockdowns to the current Level Two, Mutashu said the demand for foreign currency has more than doubled. Clothing retailers, hardware outlets and electronics shops import more than 80% of the goods they sell.

“The above paints the reality on the ground and should inform authorities on various approaches to be taken to address this elephant in the room. Cost drivers have not been letting up and these are huge pricing determinants.”

Zimbabwe Chamber of Informal Economy Association secretary-general Wisborn Malaya blamed big corporations for driving the parallel market rate.

“They are saying the informal traders and illegal traders inflate the exchange rate. But to be frank, how much is being generated by these people in the streets such that they inflate the currency to that level? A lot of money is being inflated by the big companies,” he said.

“There are big business players that inflate the money. These are the ones that dictate the pace for these figures to start to change in the market.”

Zimbabwe Congress of Trade Unions (ZCTU) western region chairperson Ambrose Sibindi said: “As workers we are very much worried because if the exchange rate is about 160 against the US dollar, it means their income is eroded.”

“Most workers don’t own houses, they are lodgers and we all know that a room in the high-density suburbs costs between US$25 and US$30. When you are having a family, you can pay between US$50 and US$60 for accommodation per month,” he said.

He said the majority of workers were earning less than ZW$30 000, while the poverty datum line is hovering around ZW$54 000.

“It shows that things are not right in Zimbabwe for the worker,” he said.

As a way forward, Bimha said the government should depoliticise economic decisions.

“So, how do we proceed, how do we rectify it? Let’s depoliticise economic decisions. Let’s go back to usage of stable currencies until people have forgotten. For it will not be in the next generation, it will be in the next 10 years,” he said.

“We need to use dual currencies for the next 10 years until such times people are seeing value in our local currency. Not legislating value, no. Until they are experiencing it. That’s how best we can go back to permanent stability.

“Otherwise anything else we are going to be doing it’s stop gap, it’s gymnastics and we will continue to have cycles of temporary stability and inflationary threats. We then lose critical mass and time in terms of macro-economic stability and timing at the time where we are supposed to be benefiting from the global process of metals,” he said.    

Dhlamini said Mangudya should tighten monetary policy, never increase money supply arbitrarily and also pay bids on time on the auction system.

“I think those would go a long way in improving the situation on the ground. This approach of arresting people who hoard a lot of money using banks is not very effective. Gideon Gono (former Reserve Bank governor) tried it before and we have seen it not being effective,” he said.

“It is part of the reasons that undermined the auction system in 2008 when Gideon Gono tried it. So we have seen the effects of such measures; they are know. Why are we repeating them when we have seen them fail in previous policy endeavours in a hard time inflationary environment?”

Economic analyst Alice Chenjerai said the government needed to have transparent monetary policy and opt for a long-term exchange rate which will hedge against any risks if there is a fluctuation in the exchange rate.

“The government should reduce its public expenditure. Public expenditure by the government mainly affects how exchange rates are fluctuating in the market. Also, the political environment and economic situation for the country is also affecting exchange rate fluctuation,” she said.

Sibindi urged the government to utilise the Tripartite Negotiating Forum effectively and abide by its resolutions.

“I think to be honest, when our President (Emmerson Mnangagwa) came into office in 2017, he said he is a listening president.

We will expect him to listen to what we are saying. How? Mind you we have that forum called Tripartite Negotiating Forum which brings in the government, labour and employers,” he said.

“That forum has proved to be the most useless. It’s a toothless bulldog. We are expecting that it should be the forum that should set the pace, where we dialogue and agree on things. But that forum has failed to work and we are worried.

“This is why, as informal economy associations, we have collaborated to say we want financial inclusion in the country. Why financial inclusion? Financial inclusion for the informal workers and traders promotes them to also have equal access to financial requirements for their projects or businesses to say they can go to a bank and access money,” Malaya said.

Mutashu implored companies and institutions accessing forex from the auction market to price their goods responsibly and desist from short-changing consumers and the general public. He said the huge demand for foreign currency has meant players not accessing forex from the auction use internal sales and source the remainder from the parallel market.

“CZR therefore calls upon government and business to urgently meet and map the way forward as consumers grapple under the heavy weight of the exchange rate dilemmas,” he said.

“CZR also implores the government to set up an inter-ministerial committee to interrogate the foreign currency exchange rate challenges, abuses, manipulation and arbitrage and map the way towards stability as the parallel market exchange rate poses a great risk of declining company projections and bottom lines.”

Malaya, on the other hand, advocated for financial inclusion, saying through it, informal traders would not be given complicated collateral requirements for them to access money from the banks. They will also not be given short-term loans at high interest rates.

“They will be accessing the money just like any other big companies and they do their business and become bankable traders. That will remove the issue of saving their little dollar in the open space where sometimes the black market is ruling and then being blackmailed,” Malaya said.

He said financial inclusion will encourage informal traders not to keep money under the pillow, but bank it in the formal banks.

“When that happens, it closes this gap which is being used to say informal traders are abusing the black market rate. The black market is being influenced by the big companies,” he said.

In a bid to address currency volatility, the Reserve Bank of Zimbabwe (RBZ), together with the ministries of Finance and Economic Development and Industry and Commerce, met with leaders of the business community this week to deliberate and find solutions to the volatility of the parallel market exchange rates.

In a statement following the meeting, RBZ governor John Mangudya said the parties unanimously agreed that while macro-economic fundamentals were sound to support exchange rate stability, immediate measures were necessary to contain the movement of the parallel exchange rates.

Mangudya said it was noted that the recent volatility in the parallel exchange rates was due to behavioural factors. In order to address these negative behavioural traits, it was agreed that a holistic and collaborative approach was required, he said.

The RBZ chief said the government affirmed its commitment to continue supporting the foreign exchange auction as a dependable and transparent source of foreign currency in the country.

The RBZ, Mangudya said, undertook to continue tightening money supply under its conservative monetary targeting framework to ensure that money supply would not be a source of exchange rate destabilisation.

It also promised to accelerate the implementation of special attractive money market instruments including exchange rate-linked instruments as an alternative investment avenue for local currency to the holding of US dollars; review bank policy rates to curb speculative borrowing; refine and streamline the foreign exchange auction system to ensure that it continues to play its price discovery role in the foreign exchange market; and deal with the funding backlog of foreign exchange allotments and take appropriate measures to ensure that the backlog does not recur.

The Bankers Association of Zimbabwe committed itself to ensuring that all bids submitted to the foreign exchange auction are authentic; ensuring continued due diligence on all their customers and applications for foreign exchange; refraining from facilitating parallel market transactions through matching.

They also undertook to improving efficiency in the facilitation of letters of credit; enhancing reporting of suspicious transactions; promptly implementing regulatory directives on freezing of bank accounts for participants in illicit foreign currency transactions; promoting confidence in the banking sector by clearing the foreign currency backlog promptly; and improving oversight on bank overdrafts to ensure that broad money is kept under check.

The retailers’ associations urged the government to ensure a level the playing field in their respective operating environments by attending to the menace of foreign currency traders milling outside and around shops and trading areas; identifying and bringing to book funders of foreign currency traders; and dealing with informal traders operating without licences and sometimes outside legal or policy parameters.

The manufacturing sector undertook to ensure responsible pricing and to comply with the three focal areas under Statutory Instrument 127 of 2020.

On their part, the government and the RBZ pledged to continue supporting the manufacturing sector by levelling the playing field to ensure that exporters obtain fair value for their exports. 

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