Overhaul the forex complex: Business

GIVEN the extent of the challenges being experienced in the country, more needs to be done to revitalise Zimbabwe’s foreign exchange system, business says.
At the same time, eyebrows were raised last week after Treasury made definitive pronouncements on the exchange rate and the country’s foreign currency auction system, instead of monetary authorities.
This comes as the Zimbabwe dollar has declined nearly 14 percent on the formal market this week alone, after the minister of Finance, Mthuli Ncube, announced then that the Reserve Bank of Zimbabwe’s (RBZ) auction system would be further modified.

“The foreign-exchange auction system will be further fine-tuned and will now auction a pre-announced envelope, on a pure Dutch auction basis,” Ncube said last week, as part of his raft of new policy measures meant to stabilise prices and the hapless Zim dollar.
However, the chief executive of the Zimbabwe National Chamber of Commerce (ZNCC), Chris Mugaga, said yesterday that the country’s forex system needed a complete overhaul.
“No one needs the current form of the forex auction system. The government has to be sincere about this and reform the forex auction system to make it work optimally. We need a revamped and reviewed auction system which does not give away arbitrage opportunities,” he told The Financial Gazette — the country’s number one business publication.
“The government has insisted that the system was a Dutch system all along. So, if they now want to make it purely Dutch, what kind of system were they using?

“Do they think that the market will trust them again? There are real trust issues that need to be dealt with here,” Mugaga added.
Economic analyst Rufaro Hozheri also called for the current auction system to be done away with all together.
“To begin with, the exchange rate and the auction system are purely monetary issues that fall under the purview of the central bank, and it’s shocking to see Treasury making such an announcement.
“Besides that, I genuinely don’t believe that there is need to fine-tune the auction system. Rather, it should be completely demolished and the exchange rate should be determined by market forces.

“If you want foreign currency you should be able to get it from your bank without any hustle, at the prevailing market rates,” Hozheri said.
“There is no need to continue with the forex auction system. This is simply because the auction is not a pure Dutch auction system, where the highest bid is allotted the funds. The priority list makes it a very different animal,” he added.
On his part, economic analyst Gift Mugano said the most practical remedy for the country’s currency challenges was full dollarisation.
“On the recent measures by the ministry of Finance, it was a mixed bag with both positives and negatives.
“But the negatives outweighed the positives, which means that the exchange rate will continue to run away until the Zim dollar is buried.
“The immediate remedy required now is full dollarisation. Anything else outside this is as good as putting lipstick on a frog to make it look beautiful,” Mugano said.
“The continuation of the auction system is a policy mis-step. The economy is now dollarised. In view of this, the auction system has overstayed its welcome. What is the rationale of allocating forex to the pharmaceutical sector or fuel dealers when they exclusively sell their products in US dollars?” he added.
Another economic analyst, Victor Bhoroma, said both fiscal and monetary authorities had promised many changes, which had not been followed through to date. He also queried Treasury’s pronouncements on monetary policies.
“However, the real cause of the country’s foreign exchange rate instability is money printing under quasi-fiscal activities and the suppression of market pricing systems.
“So, there will never be stability until the central bank ceases its quasi fiscal activities and allows a market-driven rate to be used by the financial sector. There is no sincerity in implementing reforms in government.

“What the central bank announced at the start of the auction system in June 2020 and what is happening now are miles apart,” Bhoroma said.
“The promises of reform were all rhetoric. We cannot raise hope based on podium talk or announcements. It’s always best to assess implemented policies,” he added.
But a member of the RBZ’s monetary policy committee, Persistence Gwanyanya, expressed optimism that the access of forex by the market would improve following the enhancement of the dutch auction.
“Fine-tuning of the auction system would mean the RBZ announces amounts of forex available for each auction.
“The Dutch auction system also operates on competitive bidding processes, and bids are supposed to be settled within agreed time frames.
“This is expected to restore confidence in the auction system, which was seen as an allocation mechanism,” Gwanyanya said.
He added that there was also a need for monetary authorities to keep a watchful eye on the market to weed out delinquent companies fishing for arbitrage opportunities.

“However, presented with a situation of market failure, partly occasioned by the structure of the economy, which is concentrated within a handful of players, powerful individuals and corporates, the RBZ needs to keep a watchful eye on the market.
“Left on its own, the private sector can spin the market out of control.
“The improved functionality of the Dutch Auction system is expected to gradually close the gap between the parallel and official rates, thus stabilising the Zimbabwe dollar and reduce the risk of costly re-dollarisation,” Gwanyanya said.
The president of the Confederation of Zimbabwe Retailers (CZR), Denford Mutashu, said the fine-tuning of the forex auction system was “long overdue”.
“The forex auction system has contributed to the growth and development of the economy in many spheres, hence it should be allowed to continue.
“Fine-tuning it to improve its performance is a welcome commitment by the government which should restore confidence in the economy,” he said.
In his statement last week, Ncube also announced that the RBZ would exempt all proceeds from domestic sales in foreign currency from the 15 percent surrender requirements.
This came as the government is very keen to encourage the flow of forex from the informal sector to banks.
“Foreign currency receipts across all categories of inflows have increased by at least 100 percent compared to a few years ago, and are at their highest levels in years, with total foreign currency receipts expected top US$13 billion this year,” he said.
Ncube also said the economy remained on a solid growth path, with all key productive sectors registering positive growth.
After registering about four percent GDP growth in 2022, Ncube said the government anticipated that growth for 2023 would be significantly higher than the initial projection of 3,8 percent.

Apart from that, he said food security had also been assured, underpinned by deliberate government policies and two successive good rainy seasons.
The Treasury boss also said the re-introduction of the Zimbabwe dollar had brought clarity to currency markets, as well as a number of advantages to the economy.
Together with a supportive operating framework, industrial capacity utilisation and productivity continued to grow, with about 70 percent of goods on retail shelves now being locally produced.
“In addition to widely visible tangible competitiveness of the local industry, which is evidenced by the notable growth in manufactured exports and observable import substitution effects, there is also notable growth recorded in the hard goods and intermediate goods manufacturing sectors.
“The broader economy, including the mining sector, has particularly benefited from having a significant re-alignment of domestic costs from the rebasing of wage costs in particular to the domestic currency,” Ncube added.
Despite the strong economic fundamentals, he also noted, a resurgence of macro-economic instability, with domestic inflation being driven primarily by skewed preference for US dollars as a savings currency continued to pile enormous pressure on the exchange rate, increasing the volatility of the Zimbabwe dollar.