Parallel market rate will not fuel inflation – RBZ



Dr John Mangudya

The Reserve Bank of Zimbabwe (RBZ) believes that the parallel market exchange rate will not disrupt the current dynamics of falling inflation, as informal sector transactions represent only a small fraction of total payments.

Zimbabwe’s annual inflation rate hit a record high since 2019 this month, falling to 56.37% from 106.6% in June. The RBZ predicts that inflation will dip further to 20-30% by December.

The massive fall in the annual inflation rate was celebrated throughout the economy, following the hyperinflationary era until 2008, when inflation exceeded 500 billion, according to the International Monetary Fund.

Zimbabwe has experienced a sustained rise in inflation due to the (formal) depreciation of its local currency, which lost ground against the greenback, from $ 2.5 / US $ 1 in February 2019 to $ 85 / US $ 1 currently.

But the spiral of inflation was immediately halted once the central bank introduced the Dutch auction system for foreign exchange trading in June of last year, which succeeded in stabilizing the dollar’s exchange rate. Zimbabwean.

RBZ Governor Dr John Mangudya said in an interview that the direction of the exchange rate in the future will be influenced by key economic fundamentals, both internal and exogenous.

“Go to Mbare Musika (market) today and buy, for example, bananas, what (exchange) rate are they using, $ 110 to $ 120 / US $ 1, so they (the informal sector) are not those that cause parallel market rates to increase, ”Dr Mangudya mentioned.

The Zimbabwean dollar, although broadly stable at $ 85 to the US dollar in the Reserve Bank’s weekly auctions, has reached between $ 135 and US $ 145 / US $ 1 on the black market, which some observers say reflects growing liquidity.

However, in 2021, the RBZ lowered the reserve currency growth target per quarter from 25% in 2020 to 22.5%, in order to send a strong signal to the market that the government will do whatever it takes. its power to stabilize the rate.

“They depend on the formal sector. What do they sell in the informal sector, cooking oil, sugar, milk? Have you ever seen the informal sector produce goods? They (informal sector) mainly sell finished products.

“These people do not use ridiculous tariffs as is the case in the formal sector, there are very few of them. The problem comes from oligopolies and monopolies, which is why we have proposed SI 127, to deal with outliers.

“All of my hands are on the bridge for the stability and recovery of the economy, and I am very focused on that. It is time for celebration; inflation (annual) fell from 837.5 percent in July of last year to 56 percent in one year.

“It’s a record that didn’t happen anywhere. We must therefore continue (on the current trajectory) and as governor of the central bank, the question is “How to anchor inflation expectations?” “Said Dr Mangudya.

The RBZ predicts that inflation will end the year between 20% and 30% due to fiscal sustainability, soaring international commodity prices, export growth, conservative monetary targeting and the bumper harvest.

“Most of the transactions take place in the formal sector. So why should we worry about the 5 percent in the informal sector like it’s over 95 (percent), as RBZ governor, I don’t dwell on that, ”said Dr Mangudya.

Economists estimate that more than 60 percent of Zimbabwe’s economy is now represented by actors in the informal sector, following the economic downturn that has characterized the southern African country over the past two decades.

While the currency auction system has provided relief as a source of foreign currency for registered businesses, it uses a priority list allocation framework, which means not everyone gets the scarce currency. strong.

This forces a number of economic agents, including the majority of informal sector actors, who cannot access foreign currencies on the RBZ auction system, to use the black market to procure the forex they need.

Inevitably, the high cost of buying foreign currency in the parallel market ends up being passed on and merged into the final price of the product or service, which is then sold to the unsuspecting consumer.

The captains of industry have publicly stated that given the now sophisticated form of the informal sector in Zimbabwe; formal firms also bear the cost of exorbitant parallel market rates, some using informal suppliers.

Notably however, the auction system, which distributed over US $ 1.5 billion to key sectors of the economy for imports, was credited with helping stabilize the exchange rate, hence the lower inflation.

The central bank chief said the inflation rate in the future will be guided by fundamentals, which, if correct, will anchor lower inflation. These include the external sector (exports), remittances from the diaspora (capital account), the real sector (productive industry).

Dr Mangudya said average capacity utilization in domestic industry is increasing, thanks to better access to foreign exchange, while the good agricultural season, while saving millions of foreign exchange on imports, will anchor low inflation. food.

“This currency saving will allow resources to go to the real sector, so we will continue to increase production, so the future looks brighter,” said the governor of the RBZ.

He said world economic powers like China and the United States were pouring billions of dollars into national stimulus packages, which pushed up commodity prices, much to the delight of exporters like Zimbabwe.

“As an exporter of raw materials, when prices rise, it means our foreign sector will continue to be strong. If the IMF releases the US $ 650 billion (the equivalent of Special Drawing Rights), there will be more money in the world economy, ”he said. – Herald



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