Zimbabwe’s Finance Ministry objects to business indexing pricing to black market

George Guvamatanga
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THE parallel market exchange rate should not be used as a reference for pricing in the economy as it constitutes only a small fraction of cumulative trade volumes, Ministry of Finance and Economic Development Permanent Secretary Mr George Guvamatanga has said.

According to Treasury, the parallel market accounted for less than 10 percent of foreign currency traded in the economy last year.

Business continues to index prices to the parallel market exchange rate, yet major sources of forex to import goods include foreign currency accounts (FCAs), as well as the interbank and auction systems.

In 2022, the country’s foreign currency receipts nearly topped US$12 billion.

The Zimbabwe dollar is currently trading above $1 000 per US$1 on the parallel market.

However, the willing-buyer, willing-seller rate, which is recommended for business transactions, is US$1:$779.

Indexing prices to the parallel market has been blamed for driving inflation, which reached a post-dollarisation high of 837,5 percent in 2020.

By December, inflation had slowed to 243,8 percent.

“I have indicated that the percentage of the black market (to total forex traded) is less than 10 percent. If you look at the inflows that came in the Reserve Bank (of Zimbabwe) reports, of US$12 billion traded, maybe only US$1 billion was traded on the parallel market,” said Mr Guvamatanga.

“All the other funds are traded through FCAs, auction and willing-buyer, willing-seller systems. So, why are we keen to use parallel exchange rate marginal pricing, even if someone comes to you with the argument that they are not getting forex from the auction?”

He said the question of the exchange rate does not arise when individuals or companies use FCA balances for external payments since it would be a “dollar to dollar” transaction, where the importer pays directly to external suppliers.

“You know what? We want to give so much credit to this parallel market, but when you actually look at it, this parallel market only accounts for about 10 percent of the total foreign currency traded in the economy. The bulk of it comes from the auction, interbank and FCAs.

“It (parallel market) then becomes the anchor (of pricing), which is a theorem of marginal pricing because even if you take the 10 percent and do weighted price, the rate is still probably around $840:US$1,” he said.

If economic agents in Zimbabwe were honest, he added, and used the weighted average rate or the blended rate when pricing, the applicable average exchange rate of the Zimbabwe dollar against the greenback would be around $775:US$1.

Treasury believes local pricing systems were based on speculative margins.

“It is something that we have to deal with.”

Mr Guvamatanga said while foreign currency inflows have been rising, which should be enough to keep the exchange rate stable under normal circumstances, the local exchange rate did not follow any fundamentals.

“What informs the right exchange rate? Because, in any other economy, the exchange rate is driven by the normal fundamentals that we know: inflation, interest rate differentials, and supply and demand. Mathematically, you should always be able to come up with a number and formula,” he said.

Rather than react to an increase in foreign currency inflows, he said, the local exchange rate seemed to inexplicably move in the opposite direction.

For example, the Zimbabwe dollar continued to depreciate despite Government receiving nearly US$1 billion from the International Monetary Fund in 2021, as well as having foreign currency reserves totalling over US$1 billion.

There were also significant receipts from diaspora remittances and exports.

Added Mr Guvamatanga: “Whereas in any other economy, fundamentally, such news is news that would actually result in your exchange rate strengthening, not weakening. So, (last year), we had record inflows – US$11,6 billion (almost US$12 billion) . . . and, in those instances, the rate should not be depreciating.”

He also said the real exchange rate should be informed by fundamentals and can be calculated using a mathematical formula “which you can always adjust per country peculiarities to give you the right number”. – Sunday Mail