Parallel market rate distorting pricing – CZI

Growing disparity between official and parallel market exchange rates has a destabilising effect on formal businesses that must now price their goods and services in the cost of expensive foreign currency from the open market. 

While the bulk of registered businesses in Zimbabwe now procure their forex from the Reserve Bank of Zimbabwe (RBZ)’s weekly auction flow, Business Weekly has it on good authority that a good number of the estimated 12 000 registered entities still use the parallel market to procure foreign currency.

Authorities say over 90 percent of the foreign currency requirements of industry and commerce are now met through the auction, which has disbursed over US$1.7 billion since inception in June last year, but other firms still resort to the open market.

The central bank uses a priority framework allocation system, which leaves some registered entities without formal access to appropriately priced foreign currency, forcing them to use the parallel market, where exchange rates continue to skyrocket.

RBZ Governor Dr John Mangudya recently said the auction had extended US$1,5 billion to 1 632 large corporates and US$172,8 million to SMEs with the bulk, 70 percent, allotted towards procurement of raw materials, machinery and equipment.

Zimbabwean relies on imports from across the world, but mainly South Africa, for most of the goods required in manufacturing including raw materials, machinery, equipment and key consumables, after a decade of economic meltdown and hyperinflation caused major industries to shut down.

Both Fiscal and monetary authorities, however, argue that with the auction now accounting for the bulk of importers’ foreign currency needs, forex trades on the black market are too thin to warrant a sustained parallel rate movement.

Newly elected Confederation of Zimbabwe Industries (CZI) president Kurai Matsheza, said since some registered operators continue to get forex from the parallel market, where the exchange rates are steep, the net effect is that this pushes up final prices.

“Obviously, if businesses have to find the money on the parallel market, they have to price it in their products, whatever they are doing, whether they are buying commodities or are manufacturing, they will (take) those (forex) prices into account.

“(This has the effect) of increasing prices if anybody has to get from the parallel market their forex requirements. As business, we do not know what is driving the parallel market rate, we can only speculate that there could be shortage of forex.”

In what reflects challenges faced by companies in obtaining adequate foreign currency from the auction, reports indicate that the auction system is saddled by a backlog of approved bids amounting to US$200 million.

Secretary for Finance and Economic Development George Guvamatanga, acknowledged this position a fortnight ago and pledged authorities were working on measures to clear the outstanding funds within a month and half. 

“But obviously, we are engaging the authorities and putting our minds together so that we can really pin on the issues that are causing all these problems,” the newly installed manufacturing lobby group’s president said.

Economist Eddie Cross, said widening official and parallel market exchange rates, which now stands at nearly 50 percent, had an obvious destablising effect on business operations and the way they determine their prices.

The official exchange though, Cross noted, should now be around $100/US$1, authorities appeared to be terrified by the potential negative impact this could have on prices, which have largely been stable for most of this year.

Cross said the auction was handling roughly US$2.4 billion dollars a year, while direct transactions involving banks amounted to about US$600 million a year. “So, we have US$3 billion going through the official system,” Cross said.

“And then the nostro accounts turnover about twice that a year, which is about US$6 billion, so you have a lot of money going through the official system, which we can monitor and see,” Cross added. 

Regardless of this, Cross said the open market exchange rate has continued to run wild. 

“I think there are a number of issues which are driving it; number one, we are selling fuel in US dollars. That requires about US$2.1 billion a year. Obviously, US$700 million ends up in Government hands as tax.

“The second major demand (driving the parallel rate) is; we’re buying gold, and that generally is another US$1 billion, because you have to pay for about 60 percent in hard currency and about 40 percent in RTGS.

“On top of that you have this smuggling programme across the borders, the runners. All of those runners work in US dollars. If you want to import via a runner; and many people are, you have to put up US dollars,” he said. 

Government said recently it had paid a staggering US$25 billion to farmers for grain deliveries following a bumper harvest this year. Treasury also makes regular lump sum payments to contractors undertaking key infrastructure projects, which combined, may explain the strong demand for forex, which drives open market rates higher.

Cross said, from a demand side, the three above-mentioned factors were responsible for driving continued increase in the parallel market rate, which now hover around $150/US$1 against the official rate of $85/US$1.

Cross, however, pointed out that it was perplexing why the parallel market rate has continued to run in spite of the strong positive performance of Zimbabwe’s external sector, which sees inflows of about US$5 billion annually.

The Diaspora remittances alone, Cross noted, result in inflows of around US$1.2 billion annually, which he said has contributed to the biggest housing boom in the history of Zimbabwe, while helping sustain many families.

Zimbabwe has seen growing economic stability since the inception of the auction system in June last year, anchored by a stable official exchange rate, while inflation has plummeted from a post dollarisation high of 837.5 percent in July last year to 56.37 percent 12 months later.

The annual rate of inflation, amid expected prolonged exchange rate stability anchored on the auction, is forecast to close the year around 22-35 percent, kept within check by further monetary and fiscal discipline.

The improved macroeconomic conditions have however seen growth in production volumes across key industries of manufacturing, mining, construction and agriculture, which is expected to drive strong overall growth of about 7.8 percent this year. – Business Weekly