ZNCC warns against exchange rate manipulation

BY MTHANDAZO NYONI

THE Zimbabwe National Chamber of Commerce (ZNCC) says the central bank must roll out a strategy that provides incentives to exporters, businesses and households to liquidate their foreign currency earnings into the formal market.

In an analysis of the Monetary Policy Statement (MPS) released by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya recently, ZNCC argued that current exchange rate policies encouraged traders to import finished goods, while exposing the economy to manipulation under rampant backstage deals.

“The current foreign exchange regulations are subsidising importation of finished goods, while taxing the local producers who also need to pay for various government levies in foreign currency,” ZNCC said.

“Additionally, it leads to numerous arbitrage opportunities in the importation and trading of fuel, among other commodities, which will create market shortages.

There is need to smoothen the auction system and ensure that foreign currency buyers receive their allotted foreign currency within a week so that there are no supply gaps, delays in importing raw materials and essential inputs, or renewed pressure on the parallel market,” ZNCC added.

In his MPS, Mangudya revealed that banks had agreed to settle funds allocated at the foreign currency auction system within two weeks.

Introduced in June 2020 to address a dire foreign currency crisis that threatened to ground hundreds of frail industries, the foreign currency auction system is mainly funded through export proceeds remitted by exporters to RBZ through its controversial surrender requirements.

But it ran into serious trouble during the final quarters of last year, when exporters waited for many weeks before accessing allotted funds. The delays undermined companies’ efforts to import raw materials and industrial machinery.

Almost US$800 million has flowed into industries since June.

The ZNCC also called for enhanced transparency in the operations of the auction system, saying “it seems the rate has been dragging, hence draining market confidence in the existing exchange rate”.

The paper said while there had been measured exchange rate stability since the auction system was introduced in June last year, what the markets looked forward to was a “durable stability”.

ZNCC estimates that since the launch of the forex auction system, the official exchange rate had devalued by about 30%. A major factor had been the 16% appreciation of the South African rand, Zimbabwe’s largest trading partner.

“More important is the trend of the real effective exchange rate (REER). It has appreciated some 6% since mid-2020 because the inflation gap between Zimbabwe and its main trading partners is larger than the extent of devaluation. Unless the auction rate is allowed to depreciate substantially in the months ahead, REER overvaluation will worsen. Exports will lose competitiveness and imports become cheaper, which flies in the face of the auction’s underpinnings of import controls and intervention in domestic transactions, especially but not only in the mobile space,” ZNCC added.

“For a start, it is an admission that the auction rate is not market determined and is susceptible to “adjustment by the authorities”, while secondly it ignores the fact that while the REER did fall dramatically as the currency devalued from parity with the US to its present value of 1,2 US cents, it started to rise once the rate stabilised in the third quarter of 2020,” the lobby group said.

The Zimbabwe Coalition on Debt and Development (Zimcodd) said: “Several gaps, including reducing the time it takes to access foreign currency, requires attention. So too does the need for meaningful deterrents against companies selling money accessed at lower rates on the auction at higher rates on the informal market. The 40% export surrender requirement, 20% domestic foreign exchange sales proceeds surrender requirement and 15% foreign exchange contribution from the fiscus outlined in MPS are a welcome boost to the auction system”.

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