The Confederation of Zimbabwe Industries (CZI), has warned that the country will once again miss inflation targets this year as policy makers continue to ignore fundamental issues being raised industry.
In a brief to members prepared last month and titled: “2021 Inflation and Currency Developments Round Up”, the CZI said the authorities were among other things, failing to address foreign currency auction system that saw some bids being cleared after two months.
Finance and Economic Development Minister, Professor Mthuli Ncube, in his 2022 National Budget forecasted an average inflation target of 32.6 percent and end period range of 15 percent to 20 percent.
“These can only be achieved if there is a decisive turn on the manner in which the foreign exchange auction market is handled as well as a tighter monetary policy compared to the current regime. In addition, economic agents need confidence that the disinflation programmes in place will be able to tame inflation.
“Given that these decisive measures have been acknowledged by policy makers but are taking time to implement, the likelihood that the 2022 inflation targets will be missed again remains a possibility,” said CZI.
The whole period of 2021, Zimbabwe was using a dual currency system and the Foreign Exchange Auction Market was introduced to serve as a forex allocation platform as well as a price discovery mechanism.
“However, the auction market failed dismally as a price discovery mechanism, as the rate remained largely stagnant despite a high inflation environment. The continued depreciation of the ZWL at the parallel market resulted in economic agents preferring to hold on to the more stable USD dollar.
“The demand of USD dollar increased as most of the informal sector are demanding payment in USD dollars. The inefficiencies of the auction market have also created arbitrage opportunities, which are undermining the Government effort towards vision 2030,” reads the brief in part.
The industrial lobby group lamented that the auction market suffered massive settlements delays of up to nine weeks for bidders to access foreign exchange after their local ZWL balances had already been debited.
This, according to CZI increased traffic to the alternative sources of foreign currency, which resulted in further depreciation of the ZWL, hence the inflationary pressures currently obtaining.
“The other impact of this was on the efficacy of the auction system as a price discovery mechanism and this has driven forex pricing distortions across the markets.”
The CZI said the widening exchange rate premium (parallel market premium) was the major inflation driver in the month of December 2021, where the exchange rate premium ended the year at 89 percent compared to 36 percent at the beginning of the year.
Companies used a blended exchange rate, thus, the parallel market exchange rate falls into the price determination equation, creating serious challenges in the process.
Already many companies are using US$1:ZWL$180, while the official rate is at ZWL $115, while other black market players are demanding as much as ZWL$230. – Business Weekly
