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‘More money supply sources still to be sealed’




Prof. Mthuli Ncube

HARARE – The Government, which recently admitted that it is partly to blame for the currency and price instability in the economy, still has its work cut out as there are several other sources of money supply still to be plugged out, Business Weekly can reveal.

For the past two or so years, authorities had pointed fingers at other economic actors for fueling exchange rate and price instability but with little success.

But a fortnight ago, the Government decided to bite the bullet and accused its surrogates as major contributors to price and exchange rate distortions that have characterised the Second Republic.

In a series of letters and statements, the Minister of Finance and Economic Development, Professor Mthuli Ncube and his Permanent Secretary, George Guvamatanga, admitted Government’s role in fueling price and exchange rate instability through paying for goods and services at ridiculously inflated prices by most of its suppliers.

The two revealed that Government, which is the biggest buyer in the economy accounting for at least 70 percent, was not disciplined in its spending and as a result not getting value for money.

Guvamatanga’s letter reads: “Treasury has noted with concern that line ministries, departments and agencies (MDAs) are submitting pay runs for the disbursement of cash for goods and services procured using parallel market rates.

“As you are aware, such pricing frameworks by the suppliers of goods and services, have not only been causing inflationary pressures but also fuelling parallel market activities.”

Together with President Mnangagwa they immediately put an end to such unrestrained spending ordering ministries, Government departments and agencies (MDAs) to revalidate all their contracts and align all invoices with the Willing Buyer Willing Seller (WBWS) exchange rate. The Government immediately stopped making any payments unless the ordered measures had been taken.

“In this regard, Treasury is immediately suspending all payments to MDAs while awaiting your submission of reports of findings of the due diligence exercise on all running and future contracts with special focus on pricing,’ wrote Guvamatanga.

The result has been a halt in currency depreciation and in some cases appreciation of the local currency.

Together with other measures, including the introduction of gold coins, the exchange rate has been stable on the parallel market signaling the impact of the latest measures.

Prior to the new measures, the parallel market rate was threatening to reach $1,000 per US$1, but has since found resistance at approximately $800 per US$1 while trades are taking place for as low as $700.

However, on the official market, the WBWS interbank rate, the local dollar has continued to depreciate, leaving the central bank and by extension Government faced with huge financial losses.

Having started the year officially trading at $108 per US$1, the local unit was trading at $521 per US$1 as of Wednesday this week.

Guvamatanga said that there are still structural issues within the economy that still need to be addressed for long-term price and exchange rate stability.

He said the country still has monopolies that still pose a threat to economic stability and disclosed that there are plans to develop and support new entities to challenge such monopolies.

There are several other areas where huge exchange losses are likely to be incurred following the depreciation of the local currency.

“The foreign currency backlog on the auction system and loans obtained by the central bank and extended to businesses at lower exchange rates are good examples.  Government now require large amounts in the local currency to meet those obligations” said Guvamatanga.

In a previous interview with this publication, RBZ governor Dr John Mangudya, said the losses, just like any other debt incurred by the central bank, will be assumed by the Government.

“It’s called exchange losses, that is also true for blocked funds, the blocked funds were at 1:1, but we are buying currency at current exchange rates,” he said then.

The foreign currency auction system has for years carried a backlog after the central bank auctioned foreign currency that was not readily available. This means a forex bidder would pay a lower amount than what the RBZ is eventually paying to buy the foreign currency weeks or months later to cover the backlog.

Some of the forex backlog are for funds allotted when the exchange rate was between $124.0189 (auction 83) and $ 173.2685 (auction 93) yet the apex bank would be buying foreign currency at $521 as of Wednesday’s WBWS exchange rate.

According to the Mid-Term Monetary Policy Statement, the central bank has backlog from Main auctions 83 to 93, amounting to US$169 million.

Assuming the current backlog is for forex allotted at an average $148,50 the exchange loss would amount to more than $63 billion (US$121 million).

While some see this as just a book entry, injecting the required $88 billion into the market to buy the forex belonging to successful bids by importers would distabilise the market, experts say.

The central bank negotiated and accessed offshore lines of credit from Afreximbank for the purpose of providing liquidity support to the foreign exchange auction system, refinancing some existing obligations as well as meeting the country’s balance of payments requirements.

In 2021, the Bank negotiated and accessed external facilities worth US$1,8 billion from new and existing revolving offshore facilities from Afreximbank (Including Letters of Credit facilities), Gemcorp, Trade and Development Bank (TDB) and other creditors to support the foreign exchange auction system, refinance existing obligations as well as meet the country’s balance of payments requirements.

The country is reportedly paying US$25 million a month for foreign currency borrowed from the Afreximbank. If these funds were borrowed and extended to local firms at lower exchange rates, huge amounts are now required to buy back the foreign currency and meet Afreximbank debt obligations.

Again such huge amounts are as good as injecting liquidity into the economy to foreign currency holders who might not necessarily require the local currency but are forced by law to surrender part of export earnings and local foreign currency earnings to the central bank at the prevailing WBWS exchange rate. – Business Weekly

 




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