Unitary exchange rate can end currency volatility — CZI




Anthony Mandiwanza - Dairyboard
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THE Confederation of Zimbabwe Industries (CZI) says the lack of a unitary exchange rate lies at the heart of Zimbabwe’s currency challenges and the lobby group has called for the establishment of an efficient price discovery mechanism.

 Issues around price discovery dominated deliberations at the CZI 2021 manufacturing sector survey report launch on Wednesday as industry players urged the Government to come up with measures to address the exchange rate disparities in the market.

Businesses bemoaned dual exchange rate regime in the form of the auction and interbank rates while the existence of the parallel market exchange rate, illegally used to benchmark prices by businesses, further complicated things.

As such, industry players implored the Government to put in place an effective price discovery model to ensure convergence of the exchange rates.  

Government has, however, already started responding to calls by captains of industry and commerce, and also in view of dynamics in the market, to deflate speculative bubble in the equities market and stop the currency depreciation.

President Mnangagwa announced a raft of interventions at the weekend, which entailed a drastic cut in liquidity growth, suspension of bank lending, taxes on US dollar withdrawals and tightening trading conditions on the equities market.

Finance and Economic Development Minister Mthuli Ncube said the measures were designed to stabilise the exchange rate, lower inflation and engender confidence in the economy.

The Treasury chief said the Government was confident the measures would bear fruit, drawing parallels with success of interventions in 2020, particularly introduction of the auction system, which resulted in exchange rate stability and drastic fall in inflation.

Notably, Minister Ncube said the Government retained more measures and would unleash additional arsenal to tackle factors driving exchange rate volatility and inflation, including widespread indiscipline by economic agents.

At the start of the auction system, and a stable operating environment in 2021, the parallel market rate premium went down to as low as 20 percent, inflation trended downward while industrial capacity utilisation increased modestly.

Business leaders also said investments in new projects also increased, under a largely stable and predictable environment following policy measures introduced earlier in 2020, which may not be sustainable in an economy with multiple exchange rate.

Business leaders had reservations about the willing buyer willing seller system for foreign currency, saying it was not working efficiently.

Addressing the delegates on behalf of CZI president Kurai Matsheza, his deputy Victoria Jakazi said authorities should come up with effective exchange management, a position that would direct everything to fall into place.

“The fundamental issue is exchange rate management and we have been making this call for as long as we remember.

“We are convinced that convergence of the rates brings stability as this was achieved at the beginning of the auction when a large part of the economy was indifferent to holding Zimbabwe dollar.

“Efficient price discovery must be allowed and an efficient market established, as without doing this the authorities will be chasing symptoms which continue to mutate as long as the arbitrage windows remain open.

“Getting the price of foreign currency right is a fundamental matter of Zimbabwe’s economic development interest,” said Mr Matsheza.

CZI chairman for economics committee Jimmy Psillos said the Reserve Bank of Zimbabwe (RBZ) should calibrate the auction system to efficiently discharge its mandate to instil confidence in the economy and among the citizenry.

He further noted that delayed disbursement of auction funds was creating exchange losses as the rate did not remain static overtime.

“We need to have proper price discovery, it has been said over and over again, proper willing buyer willing seller, as we speak yesterday willing buyers and willing sellers were advised of the amount they should be willing to buy and sell at.

“In terms of the auction there is a need for confidence, think about what happens to confidence if we do not disburse the money within 14 days, backlog is the other thing, it creates exchange loss because we are talking of backlog as far as last year when the exchange rate was below $100, so the central bank will be fulfilling last year’s obligation at a depreciated rate, how is that gap going to be funded,” said Mr Psillos.

He said the Government should consider regulating payments made to major country projects as it was somehow contributing to the exchange rate spike.

Mr Psillos said individuals and companies were holding on to huge amounts of US dollars as hedging means due to lack of confidence.

“There are enough US dollars to keep the business operating, that’s the truth, it is just that people rather park their US dollars somewhere and borrow Zimbabwe dollars to keep operating than use their US dollars to transact, this is a vicious cycle we would want to break out of.

“These large RTGS payments through Government contracts is a big problem because we know that as soon as they get their money, they would want to preserve value, you pay a contractor how are they going to preserve their value.

“These payments have to be carefully calibrated because you know that if you pay a certain amount to the market it will react and react negatively,” he added.

Archie Dongo, a member of the CZI economics roundtable, said 2022 had started on a negative note, as it was characterised by disposable income contraction due to sustained inflation increase, which has led to pricing challenges.

Mr Dongo noted that the manufacturing sector was covering its foreign currency requirements through sales in hard currency.

“As we saw, manufacturers are raising forex through US dollar sales to cover about 60 percent of the deficit (of their forex needs) identified by the survey. When you see products being sold only for US dollars you need to go back through the chain and sort it out. We are only seeing the results of what has been happening throughout the chain.

 “With spontaneous dollarisation along the chain manifesting itself on formal shop shelves, this is threatening the relationship between formal retail and manufacturers as it creates a preference for informal channels on the part of manufacturers,” said Dongo.

“Continued existence of arbitrage opportunities arising from foreign exchange management regime is causing damage and disruption of our orderly distribution channel due to informalisation,” he said.

With regards to currency manipulation, CZI council member and Dairibord holdings limited chief executive

 Mr Mandiwanza

implored the Government to face the delinquents head-on to nip the recurring arbitrage issues in the bud.

“If there are offenders in the system it does not matter whether they are from business or from the streets, the government’s role is to deal with those offenders, and business will always stand on the side of the law, we cannot try to deal with an issue by hiding the very offenders.

“If they are taking money from the auction going to ‘burn’ it at the Zimbabwe Stock Exchange, deal with them because they are known, the RBZ has the capacity to track each individual offender, the bank’s know your customer knows who is doing what, deal with them do not punish all of us,” said Mr Mandiwanza.

According to the business leaders, the first quarter of 2022 was characterised by several challenges, which included high costs of inputs due to surging inflation which was growing the business’s inability to have pricing to replace stocks.

The business leaders also lamented diminished export competitiveness attributable to heavy taxing on exporters as well as the detrimental parallel market exchange rate premium on surrender requirements.

They also decried policy that subsidises imported industrial products, which are competing unfairly for supermarket shelf space with locally manufactured goods and holding the potential to accelerate deindustrialisation.

Players however, cited the need to ensure that the positive momentum gained in 2021 is maintained. It is important to ensure the operating environment is stable, especially bringing finality to the currency and inflation challenges.

Zimbabwe’s manufacturing sector’s capacity utilisation for 2021 grew to 56,52 percent from 47 percent in 2020 spurred by notable investments by companies.

The 56,25 percent growth in manufacturing sector capacity utilisation is the highest in 10 years after a 57,2 percent growth in 2011 owing to efforts being directed towards making the country a production hub again.

2020 capacity utilisation stood at 47 percent from 36,4 percent in 2019.

According to the survey, a total of $147 million was invested by companies in the manufacturing sector during 2021, which saw  additional capacity of 25, 6 percent being created.

Roughly 37, 8 percent of the manufacturing sector players undertook some form of capital expenditure to increase their production capacity in 2021.

About 56 percent of the surveyed firms registered growth in industrial capacity utilisation while 26 percent saw a decrease in the year.

Eighteen percent remained flat as their output neither increased nor declined.

The drinks and tobacco segment had the foremost growth in output at 82 percent, followed by the wood and furniture sector.

The other notable sub-sector growth was seen in the chemicals and petroleum segment, which recorded a 64 percent average capacity utilisation followed by clothing and footwear whose capacity utilisation grew to 60 percent.

 “The total amount of investment that was carried out in 2021 to increase capacity by surveyed firms amounted to $147 million.

“According to the survey 37,8 percent of the manufacturing sector undertook investments to increase their production capacity in 2021,”

According to the survey 37, 8 percent of the manufacturing sector undertook investments to increase their production capacity in 2021,” said Confederation of Zimbabwe Industries Chief economist Dr Cornelius Dube.

 Mr Dube

The paper printing and publishing sector had the highest additional capacity at 50,6 percent followed by the chemicals and petroleum products segment at 30 percent.

 Notable efforts towards adding capacity were made in the non–metallic mineral products and the drinks – tobacco segments which recorded 29 percent and 28 percent growth respectively.

However, according to the CZI survey, inclusion of small-scale players weighed down capacity utilisation.

19,19 percent new jobs were created in the year against 16 percent that was retrenched.