Kudakwashe Chideme, News Editor 
BUSINESS and monetary authorities agree on the urgent need to refine the foreign currency auction system, to stem the growing threat to the economy of the resurgent forex parallel market.
This comes as the auction system has been widely credited with stabilising Zimbabwe’s economy and its once derided local currency since its introduction in June last year.
after more than a year of holding steady against the coveted United States dollar, the local unit has slid to up to 160 against the greenback on the parallel market — compared to the auction rate of about 87 — thereby jeopardising the country’s economic recovery.
Reserve Bank of Zimbabwe governor, John Mangudya
The governor of the Reserve Bank of Zimbabwe (RBZ), John Mangudya, told The Financial Gazette yesterday that the central bank was “seized with the matter” — adding that authorities had started to significantly reduce the forex backlog over the past two weeks.
“The Reserve Bank of Zimbabwe is alive to the need to refine the foreign exchange auction system to reflect the requirements of the market.
“In this regard, significant progress has been made to expunge the auction allotments backlog over the past two weeks.
“It is, however, paramount to note that the movement of the exchange rate on the parallel market is not driven by economic fundamentals, which are currently strong, but by sentiment,” Mangudya said.
“The amount of local currency of reserve money of Z$28 billion (US$322 million) in the economy is far less than the US$1,7 billion foreign currency in the banking sector, US$1,2 billion in foreign exchange reserves (inclusive of Special Drawing Rights holdings) at the Reserve Bank and approximately US$2 billion in circulation in the domestic market.
“The savings realised from the importation of grain as a result of the bumper harvest on grain and the increase in capacity utilisation all point to strong economic fundamentals which should, under normal circumstances, hold and stabilise the exchange rate.
“Further to this, the bank has also established several channels for the public and business to access foreign currency, from the small transactions of US$50 per week through bureaux to SMEs to cater for individuals and companies that have requirements for foreign currency to procure goods and services and the main auction for larger producers,” Mangudya further told The Financial Gazette.
Kurai Matsheza, CZI President
On their part, business leaders implored authorities to move with speed to prioritise the honing of the forex auction system, as the widening gap between the official and the black market rate was threatening to retard the visible economic gains the country had made since mid last year.
The president of the Confederation of Zimbabwe Industries (CZI), Kurai Matsheza, said part of the challenge was that the foreign currency allocations at the auction system appeared not to be dependent on available cash.
“It is based on what they expect to receive at some point in time. Maybe those funds do not come as expected all at once or as they plan. So, that’s how these backlogs are then created.
“We would like to see changes to the bid ranges for big companies, as well as allotments for the main auction and the SMEs’ auction. But for now, we would rather focus on availing the cash for winning bidders and clearing backlogs,” Matsheza told The Financial Gazette.
The chief executive of the Zimbabwe National Chamber of Commerce (ZNCC), Chris Mugaga, said business was of the view that “a more market-driven” system would work better.
“The situation is adding to the already existing sovereign risk by pushing away any potential suppliers on credit as payments lag by as much as nine weeks. This creates a confidence deficit and it becomes difficult to negotiate business without paying cash upfront.
“As ZNCC, we continue to clamour for an exchange rate that is reflective of the market dynamics,” Mugaga said.
“As long as we continue to have a controlled rate, we will always have a backlog. Once a market-clearing level is achieved, we will do away with the backlog because there will be an equilibrium in the supply and demand for hard currency,” he added.
Also contacted for a comment, analyst Evonia Muzondo told The Financial Gazette that the widening gap between the official and parallel market was indicative of “basic disequilibrium”.
“Sustainability of the auction system largely depends on the authorities’ full commitment to reforms, and to safeguarding the integrity of the auction market. “It is important that fiscal and monetary policies be adjusted to support a stable and market-determined exchange rate. In addition, government interference must be eliminated or at least reduced to basic market support.
“Unfortunately, the confidence deficit continues to increase, and it is also compounded by the backlog in funding allocations,” Muzondo said.
All this comes as business has also warned that the country’s worsening power cuts, which are blamed on inadequate generation capacity and ageing infrastructure, are threatening Zimbabwe’s economic recovery and rising industrial capacity utilisation.
Speaking to The Financial Gazette last week, concerned captains of industry and commerce said the debilitating power disruptions were seriously affecting production at a time that the country’s economy could ill afford fresh knocks after enduring a hard national coronavirus lockdown for the past 18 months.
Zimbabwe needs between 1 350MW and 1 800MW of power to meet its daily electricity demand, against a current production capacity of around 1 000 megawatts.
The return of relentless load shedding comes as business has expressed confidence that Zimbabwe’s sturdy economic performance of the past year will be maintained for the remainder of this year and into early 2022.
Business leaders who spoke to The Financial Gazette recently — in the wake of continuing macro-economic stability, the accelerating vaccination programme against the coronavirus pandemic and a further lightening of the national lockdown, which has seen a welcome return to normal business trading hours — also said indications were that the government’s ambitious economic growth forecast of 7,8 percent for the year could be within reach.
All this follows the recent release of nearly US$1 billion to Zimbabwe by the International Monetary Fund (IMF), through its Special Drawing Rights (SDRs), which has further lifted business sentiment in the country.
At the same time, business has implored authorities to spend at least half of the IMF windfall on the productive sector, to further stimulate economic growth and help companies recover from the negative effects of Covid-19.
newsdesk@fingaz.co.zw
