The growing disparity between official market and parallel market exchange rates has a destabilizing effect on formal enterprises, which must now price their goods and services at the price of expensive free market foreign currencies.
While most businesses registered in Zimbabwe now source their foreign currency from the Reserve Bank of Zimbabwe’s (RBZ) weekly auction feed, Business Weekly has good sources to say that many of the approximately 12,000 entities registered companies still use the parallel market. to obtain foreign currency.
Authorities say more than 90 percent of industry and commerce’s foreign exchange needs are now met through the auction, which has paid out more than $ 1.7 billion since its inception in June last year. , but other companies still use the free market.
The central bank uses a priority framework allocation system, which leaves some registered entities without formal access to foreign currencies at an appropriate price, forcing them to use the parallel market, where exchange rates continue to soar.
RBZ Governor Dr John Mangudya recently said the auction awarded $ 1.5 billion to 1,632 large companies and $ 172.8 million to SMEs, the bulk of which, 70%, was allocated to the purchase of raw materials, machinery and equipment.
Zimbabweans depend on imports from around the world, but mainly South Africa, for most of the goods needed for manufacturing, including key raw materials, machinery, equipment and consumables, after a decade of economic crisis and hyperinflation which has resulted in the closure of major industries.
Tax and monetary authorities, however, argue that with the auction now accounting for the bulk of importers’ foreign exchange needs, black market foreign exchange transactions are too thin to justify a sustained parallel rate move.
Newly elected Zimbabwe Confederation of Industries (CZI) President Kurai Matsheza said that since some registered traders continue to obtain foreign exchange in the parallel market, where exchange rates are high, the net effect is that this drives up the final prices.
âObviously, if companies are to find money in the parallel market, they owe the price in their products, whatever they do, whether they buy raw materials or manufacture, they (will hold) those prices. (forex) into account. .
â(This has the effect of) raising prices if someone has to get their foreign exchange needs from the parallel market. As a company, we don’t know what is driving the parallel market rate, we can only speculate that there might be a forex shortage.
In reflecting the difficulties faced by companies in obtaining adequate foreign currency at auctions, reports indicate that the auction system is grappling with a backlog of approved bids amounting to US $ 200 million.
Finance and Economic Development Secretary George Guvamatanga acknowledged this position a fortnight ago and promised authorities would work on measures to clear overdue funds within a month and a half.
âBut obviously we are engaging the authorities and putting our minds together so that we can really pinpoint the issues that are causing all of these problems,â said the chairman of the newly installed manufacturing lobby group.
Economist Eddie Cross said the widening of official and parallel market exchange rates, which now stand at nearly 50 percent, has had a clear destabilizing effect on business operations and the way they determine their price.
The official trade, however, Cross noted, is now expected to be around $ 100 / US $ 1 as authorities seemed terrified of the potential negative impact this could have on prices, which have been largely flat for the major part. part of this year.
Cross said the auction handles around US $ 2.4 billion per year, while direct transactions involving banks amount to around US $ 600 million per year. âSo we have US $ 3 billion going through the official system,â Cross said.
“And then the nostro accounts turnover is about twice a year, which is about US $ 6 billion, so you have a lot of money going through the official system, which we can monitor and see,” Cross added.
Regardless of that, Cross said the free market exchange rate continues to rampage.
âI think there are a number of issues that motivate him; number one, we sell fuel in US dollars. This requires approximately US $ 2.1 billion per year. Obviously, $ 700 million ends up in the hands of the government as a tax.
âThe second major demand (driving the parallel rate) is; we buy gold, and that’s usually $ 1 billion more, because you have to pay about 60% in hard currency and about 40% in RTGS.
âOn top of that, you have this program of smuggling across borders, runners. All of these runners work in US dollars. If you want to import via a runner; and a lot of people are, you have to pay US dollars, âhe said.
The government recently said it had paid farmers US $ 25 billion for grain deliveries following a bumper harvest this year. The Treasury also regularly pays lump sums to entrepreneurs undertaking key infrastructure projects, which, combined, may explain the high demand for forex, which drives free market rates up.
Cross said that on the demand side, the three factors mentioned above were responsible for the continued increase in the parallel market rate, which now hovers around $ 150 / US $ 1 from the official rate of $ 85. / US $ 1.
Cross, however, stressed that he was puzzled as to why the parallel market rate continued to operate despite the strong positive performance of Zimbabwe’s external sector, which registers inflows of around $ 5 billion per year.
Diaspora remittances alone, Cross noted, generate inflows of around $ 1.2 billion a year, which he says contributed to the biggest real estate boom in Zimbabwe’s history. while helping to support many families.
Zimbabwe has experienced increasing economic stability since the auction system was established in June last year, anchored by a stable official exchange rate, while inflation fell from a post-dollarization high of 837.5 % in July of last year to 56.37% 12 months later.
The annual inflation rate, in a context of the expected prolonged stability of exchange rates anchored in the auction, should end the year around 22-35%, under control by reinforced monetary and budgetary discipline.
Improving macroeconomic conditions, however, have led to growth in production volumes in key sectors of manufacturing, mining, construction and agriculture, which is expected to result in strong overall growth of around 7 , 8% this year. – Business weekly