Prices start dropping…Parallel rates expected to fall further

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Prices of goods and services continue to tumble as the new measures to adopt a local currency begin to tame runaway speculative activities and upward movements of the parallel market exchanges rates that had become rampant in the economy.

There are expectations that there will be continued pressure for prices to come down as Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya said yesterday the central bank would move in to support bureaux de change so that they can operate efficiently and effectively.

On Monday Government removed the multi-currency regime and restricted domestic transactions to local currency.

Under the multi-currency regime, which had made US dollar the de facto currency of exchange in local transactions, most retailers and service providers were increasingly adjusting their prices in tandem with parallel market exchange rates.

However, for the first time since the currency reforms began on October 1 last year, the interbank rate, at 1:8 at some banks, was more than the parallel market exchange rates, which hovered between 1:7 and 1:7,5 for electronic transactions.

But for cash transactions, parallel market rates – trading between 1:6 and 1:6,5 – were considerably lower.

Prices fell as a result.

A survey by The Sunday Mail showed that cooking oil prices, which breached the $20 price for a 2-litre bottle, was retailing between $16 and $18 at several outlets yesterday.

The price of a 2-kg bag of flour had also slipped to between $11 and $12 from the previous range of $15 to $30.

A 2-kg bag of rice was selling between $10,50 and $11, representing a downward revision from top prices of $24.

Also, prices of a 1kg packet of washing powder had dived to $20 from between $34 and $38.

Regaining Control

RBZ Governor Dr John Mangudya said compliance with the new mono-currency regime was encouraging, as more people were transacting in local currency.

“The market has reacted positively to the recent currency reforms implemented by Government. We have seen people now paying in the local currency. What it means is that we are now going to conserve foreign currency, it also means we are going to be a competitive country,” said Dr Mangudya.

Before the new policy measures, the market, the central bank chief said, was increasingly dollarising, which, in turn, put incredible pressures on the RTGS as the US dollar was not only being drained through foreign payments by also stretched through local transactions.

Dr Mangudya said the apex bank would ably support the local currency through restricting the growth of both money supply and the fiscal deficit.

“With this instrument (SI 142 of 2019) we are going to conserve foreign currency for foreign payments. What we are going to do now is to restrict growth of money supply and fiscal deficit.

“We are also going to relax regulations so that there is ease of transaction. We are going to capacitate the bureaux de change to buy and sell foreign currency for transactions as low as US$500 to cater for small to medium scale enterprises.

“We have also removed administrative limits on the operation of bureaux de change and on the cap on margins for banks for interbank foreign exchange transactions,” he said.

RBZ has also scrapped the 2,5 percent margin on foreign currency trades with immediate effect.

Government has made a commitment to fine-tune the interbank market to operate efficiently and effectively.

The decision to abandon the multi-currency system came after noting that the market was choosing to price most goods and services in US dollars when the majority of citizens earned the local unit.

Apart from increasing efficiency of the interbank, the RBZ has put in place letters of credit (LCs) amounting to US$330 million for importing critical commodities such as fuel, cooking oil and wheat.

In addition, the central bank was expected to have mopped $1,2 billion from the market by the end of last week through directing banks to transfer to it the RTGS balances they are holding as counterpart funds for the foreign currency historical or legacy debt that Government, through the Reserve Bank, is assuming at the rate of 1:1.

Moral Persuasion

Economist Dr Gift Mugano said there was now need for Government to use moral persuasion to urge retailers and service providers to review their prices.

“The move allows people to change money the normal way. The holders of the liquidity are now dry and this was a good move by the RBZ.

“There is also need for moral suasion for those that had pegged their prices against the black market US dollar rates to discontinue the practice,” he said.

The latest round of monetary reforms, he added, had an immediate positive impact as foreign currency parallel market exchange rates tumbled.

Mr Persistence Gwanyanya, an economist and managing director of Bullion Group, said the reaction of the market has put paid to expectations that the introduction of the local currency would lead to an economic implosion.

“On the extreme end, there are those who were greatly opposed to Zimbabwe dollar reintroduction and predicted its implosion from the very beginning. These have been proven wrong as the local unit actually strengthened. Barely three days after its introduction, the Zimbabwe dollar sharply appreciated to an average of 1: 8 from as low as 1:13, which saw rate convergence at some banks,” said Mr Gwanyanya.

Demand and supply dynamics will force retailers to revise their prices.

Mr Gwanyanya said Government had to continue supporting the local unit through sterilising the Zimbabwe dollar by mopping excess liquidity and improving the supply of foreign currency on the interbank market.

The new regime is expected to conserve foreign currency and help the RBZ repay its foreign obligations.

Confederation of Zimbabwe Industries (CZI) president Mr Henry Ruzvidzo told our Bulawayo Bureau that although some pricing trends were being driven by uncertainty, they would soon be be adjusted in tandem with developments in the market.

“Prices at the moment are not stable, basing on the current situation. But soon things will settle down. Most of these retailers and shops raising prices are just panicking. Therefore, retailers cannot afford to have such high prices as it would largely affect their business and growth,” he said.