Ease FX markets, industry tells Government

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CONCERNED economic experts have made a fresh call to authorities to urgently consider liberalising the forex market in response to the country’s currency volatility and rising inflation.

Speaking to The Financial Gazette — Zimbabwe’s number one business publication and prime voice for local industry and commerce — the experts said this week that doing this would shore up the ZiG and also boost companies and the wider economy.
They also variously described current monetary policy interventions, including the recent injection of US$64 million into the interbank foreign exchange market by the Reserve Bank of Zimbabwe (RBZ) to help meet hard currency demand, as well-meant but “inadequate” and “unsustainable”.

This comes after major retailers — critical components of Zimbabwe’s economy — recently highlighted the escalating challenges posed by the current forex system, which has seen some of them experiencing losses of up to 49 percent on some product lines due to the widening gap between official and parallel market exchange rates.
“The situation is clearly untenable and will lead to company closures if authorities do not intervene with policy measures to protect the formal retail sector,” the powerful Retailers Association of Zimbabwe (RAZ) warned starkly last week.
The chief executive of the Zimbabwe National Chamber of Commerce (ZNCC), Chris Mugaga, was among the many experts who told The Financial Gazette this week that a major issue in the economy was the increasingly rising gap between the official and parallel forex market rates.
“Our hope as the private sector and as the Chamber of Commerce is to push for an agenda that advocates for a market-determined exchange rate.
“Without doubt, the problem is the environment which creates such a superficial exchange rate. This has seen the market rejecting the official exchange rate,” he said.
“The identified challenges are not unique to retailers. They are also affecting or impacting on manufacturers, as well as households and the health of all other players.
“Going forward, let us advocate for a market-determined exchange rate. Let’s focus on the underlying factors, of which the exchange rate is a major one that is attracting a lot of players to be interested in this subject,” Mugaga added.
Economist Nyasha Kaseke echoed the same concerns, further bemoaning the dominance of the informal market in the economy as a key challenge.
He also said the inability to convert the ZIG into US dollars at formal outlets had driven demand for foreign currency into the parallel market, which was offering significantly higher rates.

“There is a very wide gap between the formal exchange rate and what the informal market is offering,” he added, further urging the RBZ to direct foreign currency resources to major retailers to reduce demand on the parallel market.
Kaseke also warned that the widening gap between the official and parallel market forex rates, combined with the misallocation of foreign currency in the economy generally, could trigger a return to runaway inflation in the country.
“The central bank governor and the government must act fast to reduce or limit this challenge, otherwise we risk going back to the hyperinflation era,” he said.
Another economist, Vince Musewe, said the RBZ’s attempts “to control the exchange rate” were bound to fail.
“We have seen this before with bond notes. We are doing the same thing now and expecting different results.
“Free enterprise and free markets work. Let the market price the ZiG rather than trying to police its value,” he said.
Musewe also said that injecting more US dollars into the formal market would not increase confidence in the ZiG.
“The market will merely suck in the US dollars, and then we are back to square one,” he added.
Economic analyst Victor Bhoroma said the RBZ should move towards a managed floating exchange rate system, where banks acted as matchmakers and the apex bank only intervened through open market operations.
“Ending quasi-fiscal operations and the RBZ’s parallel funding of government expenses would go a long way in addressing the artificial demand for forex which continues to distort the market,” he said.
Bhoroma also said authorities needed to revisit their strategies to eliminate exchange rate distortions which were creating opportunities for arbitrage.
“This has disadvantaged formal retailers who are expected to sell goods at official rates while competing with vendors and other informal businesses that deal strictly in foreign currency,” he said further.
Yet another economist, Kudakwashe Munemo, called for greater transparency in the exchange rate discovery process, arguing that the current system had eroded public confidence in Zimbabwe’s monetary policy.
“The authorities must enhance transparency and openness in the exchange rate model to avoid distortions between the implied and actual exchange rates.
“Measures should also be put in place to boost citizen confidence in the monetary policy institution and the government,” he said.
Veteran economist Tony Hawkins described the RBZ’s current policies as unsustainable.
“We now have the bizarre situation where the central bank governor says he is building up reserves to subsidise imports, while using confiscated export revenues to do so. It is economic madness,” he said.

Hawkins added that the formal retail sector was in a strong bargaining position due to its contribution to GDP, employment and tax revenues.
“The solution is not more fiddling with a system that is going to collapse anyway, but to liberalise the exchange rate so that it reflects the real cost of imports,” he said further.
Vincent Moyo, a research fellow at the Public Policy and Research Institute of Zimbabwe, said exchange rate distortions had significantly undermined the value of the local currency and created room for arbitrage which was disadvantaging formal retailers.
“The authorities need to revisit their strategies to eliminate exchange rate distortions. It is now common knowledge that the local currency has significantly lost its value almost half a year since its introduction.
“This has created some element of arbitrage behaviour in the economy, which disadvantages formal retailers who are expected to sell their goods at official rates.
“This also makes their prices uncompetitive to foreign currency holders who opt to buy from vendors and other retailers who sell strictly in foreign currency,” Moyo added.
All this also comes after the Confederation of Zimbabwe Retailers (CZR) called for dialogue between the government and stakeholders to address growing challenges in the retail and wholesale sectors.
“The current trajectory is unsustainable, and without meaningful intervention, we risk further closures and economic stagnation,” CZR added.
In their recent position paper to authorities, RAZ members said currency volatility was badly affecting their operations, with some of them now on the verge of collapsing.
“Suppliers of goods and services into the formal retail sector are now maintaining two-tier price lists for the local currency and another for foreign currency, whose implied rates are way higher than the obtaining official exchange rate based on the banking system’s Willing-Buyer Willing-Seller (WBWS) platform.

“Our suppliers have expressed concern that they are faced with an acute foreign currency shortage and excessive volatility of ZiG exchange rates on the parallel or alternative market, which has now become the basis of their pricing framework,” they said.
“Manufacturers and distributorship suppliers are using variable exchange rates depending on their source of forex.
“While suppliers have the flexibility of adopting variable exchange rates, formal retailers are mandated to use the WBWS official exchange rate, currently pegged at ZiG14,8 to US1, thereby exposing retailers to massive losses.
“The situation is clearly untenable and will lead to company closures if authorities do not intervene with policy measures to protect the formal retail sector,” the association added.
It also implored authorities to inject more foreign currency into the formal sector and to implement a discounted pricing regime.
“To avert massive financial losses, formal retailers have had to take steep US dollar price increases to generate revenues at the WBWS exchange rate that would be commensurate with suppliers’ unit selling price into retail.
“This inevitably leads to real US dollar inflation creeping along with many other economic and social ills as consumers shun formal retailers in favour of informal channels,” RAZ said further.
Many other economic experts have also previously urged authorities to bite the bullet and liberalise the foreign exchange market to shore up the local currency.
“The collapse of the ZIG, which is currently under way, and which now has devalued by almost 100 percent in the past month or so, will continue if policy is not changed.
“There is no point in the government trying to hold the value of the ZiG by simply making it illegal to do anything else except to trade in the local currency at the official rate.
“In fact, that policy is currently creating enormous difficulties for the formal sector and we already have inflation rising in both US dollars and in local currency terms.
“This is a real crisis and it must be attended to as quickly as possible,” well-known economist, Eddie Cross, told The Financial Gazette’s sister paper, the Daily News last week.
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