Zimbabwean Central Bank, treasury, banks accused of fuelling volatility

HARARE – Treasury, banks and the Reserve Bank of Zimbabwe (RBZ) are equally to blame for the volatility of the Zimbabwe dollar exchange rate, which has stoked resurgent inflation, analysts say.

While the central bank denies blame for driving the exchange rate instability through creation of excessive liquidity, economic analysts say its violation of true Dutch auction system principles had negatively impacted the currency.

The auction system was introduced mid 2020 amid sustained volatility and runaway price increases, but its introduction brought relative stability, sharp inflation decline, until mid-last year.

However, the RBZ things the exchange rate volatility makes little economic sense given existing strong fundamentals in relation to the stock of foreign currency inflows and local currency liquidity.

Instead, it blames excessive demand for forex, market indiscipline and lingering memories from the hyperinflation era for driving instability of the local unit.

Zimbabwe is facing renewed inflationary pressures largely stemming from the pass through effects of the depreciating Zimbabwe dollar on the parallel and the auction market.

The continuous slide in the exchange value of the Zimbabwe dollar follows attempts to de-dollarise the economy in February 2019 after 10 years of a US dollar anchored multicurrency regime.

The domestic unit now exchange hands for anything between $300/US1$ and $400/US$1 depending on whether one is dealing in Zimbabwe dollar hard cash or RTGS dollars.

On the auction, the down spiral has been rather a little watered down, touching a new high since inception of the auction system, at $165/US$1 on Tuesday, this week.

The exchange rate volatility has rekindled a spate of prices increases, which have sparked inflation since mid-last year when it touched a two-year low at 50,1 percent in June.

Prior to the sustained inflation decline up to mid last year, exponential increases saw the country’s annual inflation reach a post dollarisation high of 837,5 percent in July 2020.

But resurgent inflationary pressures emerged late last year amid renewed market indiscipline and speculative behaviour, which has been worsened by rising prices of key global commodities due to the war in Ukraine.

Some economic observers have since warned that without an immediate plan to rein in the free fall of the Zimbabwe dollar, authorities were losing the fight to keep the currency alive.

The chilling warning comes after Zimbabwe reintroduced the domestic unit in February 2019 after a 10-year hiatus forced by hyperinflation, which shot to a global record of 500 billion percent in August 2008, according to International Monetary Fund.

Economist, Professor Gift Mugano, said the Treasury should partly take the blame for causing volatility of the domestic currency due to the manner it has funded public infrastructure and agriculture programmes.

Mugano said Finance and Economic Development Minister, Mthuli Ncube’s Treasury was making a grave mistake in funding massive public infrastructure projects through the national budget.

“Our current model for funding agriculture and funding construction work is backfiring. On construction work, we are using short term finance to fund construction work, which is long term infrastructure, using the budget.

“Just to give you figures, in the national budget for 2021, it was 32 percent of the total budget going to capital expenditure. And this 32 percent was going to roads and dam construction.

“This 2022 budget, the capital expenditure is now at 34,2 percent, which means again, we are increasing expenditure going towards capital programmes.

“We are talking about over $300 billion going to roads and other capital expenditures like dams. When you bring in agriculture, it goes to 12 percent of the total budget, which is just above $100 billion.

“If you say capital expenditure, plus agriculture expenditure, it is almost half of the national budget going to two areas. We are talking about above $400 billion, which is finding its way into the market.

“And so we kind of have a situation where the budget has become like a new central bank in terms of printing money. Whatever the Governor and his team are doing at the central bank is being weighed down by the performance of the budget.

“This money is finding itself in the black market because people will then be moving cash across various actors who are participating in this road construction,” Mugano said.

He said he had suggested to Government the need to use long-term finance for key infrastructure, required by any economy to function productively and optimally.

There was also need, Mugano said, to use financing frameworks such as public private partnerships to fund public infrastructure, the same way the Government did on the Mutare-Bulawayo-Plumtree road rehabilitation.

“Diasporans are bringing in something close to US$1,5 billion every year for social support, yes, which means there is room for us to even register a diaspora bond, which can be used to fund infrastructure.

“The way of recovering the money would be through the toll gates. The diaspora can bring its money and now have an investment vehicle for the next 30 years, where they will be getting the money from the toll gates,” he said.

Such alternatives have been successfully used to develop key infrastructure projects in other countries, Mugano said, and a good example was Ethiopia’s Grand Renaissance Dam.

In terms of financing agriculture, Mugano said Government should use the commodity exchange to market and create tools to fund production instead of using Command programmes.

Mugano said the second side of the sources of the factors fueling exchange volatility lay in the manner the central bank had flouted the principles of a “real Dutch auction system”.

He said a true Dutch Auction system had three key principles, including declaration of the exact amount of foreign currency, which importers should bid for.

“You don’t go to a vehicle auction without knowledge of the type of cars to be auctioned. So, the central bank must advise the public how much money is available for the auction that week.

“They have not done that, people (importers) are doing it blindly, bidding without full information on how much is available. Eventually you think money is there, yet it is not there and you underbid.

“The second violation (of the auction) is around the pricing regime. When you go for an auction you say the highest bidder wins, right? In our instance, we take an average price. What it does is it encourages low bids.

“When I bring a low bid, I then weigh down on the final exchange because they (RBZ) are going to take an average exchange rate (bid). So, we are now not having true price discovery, which is now resulting in the gap between the black market and official exchange rate.

“When that happens is that the black market runs away because it has nothing to hold it back and the official exchange rate is not going to sanitise things,” Mugano said.

He added that the third violation of Zimbabwe’s Dutch auction system entailed delayed disbursements of approved or allotted bids, which in RBZ’s case takes several weeks or months.

“So, you are then killing the solution which should deal with the black market rate, people then go to the black market and the black market is thriving,” he said.

Economist, Eddie Cross, shared similar sentiments on the drivers of exchange rate volatility in relation to how the central bank is managing the auction system.
“I think we are losing the fight to keep the Zimbabwe dollar alive and if we lose that fight, we lose a lot more other things; we lose job creation, we lose competitiveness, we lose our ability to make the economy grow rapidly into the future.

“Local currency is much more than just a means of exchange, it is also a means of controlling our destiny, our future. We have to find how to bring the Zim-dollar back as a means of exchange,” he said.

Cross sad all the authorities were doing was fiddling, adding there was no real market for a foreign exchange, a requirement that could stem out exchange rate volatility overnight if it was put in place.

“The fundamental problem is we have no real market for foreign exchange and until we establish a genuine market for foreign exchange and allow it to operate freely we will not be able to get on top of the situation.

“We gotta harness the market in order to fight the people who are currently manipulating the market for their own benefit,” Cross said in an interview.

Reserve Bank Governor said the warped confidence in the local currency was a result of bad memories from the 2008 hyperinflation era, driving excessive demand for US dollars, used as a hedge.

RBZ Governor Dr John Mangudya said the current liquidity levels were insignificant to warrant the volatility being witnessed in the foreign exchange market.

“The country generated foreign currency amounting to US$9,7 billion in 2021 and has so far received US$2,4 billion for the first quarter of 2022, representing an increase of 17,6 percent from US$2,04 billion received during the same period in 2021,” said Dr Mangudya.

“Money supply has also remained under control, with average reserve money of $28 billion, equivalent to about US$180 million at the auction rate.

“In addition, the total local currency deposits at $313 billion at the end of March 2022 is equivalent to around US$1,3 billion at the current interbank rate.

President Mnangagwa said last week that the Government would soon announce a raft of policy measures to stabilise and defend the Zimbabwe dollar against emerging inflationary pressures, some of which are unwarranted as the economy is relatively in good health.

Dr Mangudya said policy interventions to address the exchange rate current challenges should consider the need to restore and boost confidence and discipline in the economy. – Business Weekly