Forex auction system to affect tobacco sales

Source: Forex auction system to affect tobacco sales | The Herald

Forex auction system to affect tobacco sales
Dr Mangudya

Business Reporter

Tobacco deliveries are likely to slow down this week after the Reserve Bank of Zimbabwe (RBZ) announced that it will, starting tomorrow, adopt a foreign currency auction system as farmers await a better exchange rate.

Tobacco is Zimbabwe’s second largest foreign currency earner after gold and last year generated US$747 million in exports mainly to China and Europe.

One of the reasons being cited for the slow deliveries is the exchange rate which has been fixed at 25 against the US dollar since March this year.

It is trading around 1:80 on the black market.

In Zimbabwe, prices normally track the parallel market rates. In fact, most businesses including supermarkets, retailers and manufacturers are now using black market rates when setting prices for goods and services.

The official exchange rate has not moved since March when the central bank fixed it to provide certainty of pricing following the outbreak of coronavirus.

Tobacco farmers get 50 percent of their earnings in foreign currency with the remainder liquidated at the official exchange rate.

“We are likely to see a situation where farmers will adopt a wait see attitude obviously hoping for a better exchange rate so deliveries will disappear for a while,” said an official with a leading tobacco company.

In a statement on Wednesday, the central bank governor Dr John Mangudya said the introduction of a new forex trading system sought to bring transparency in the trading of foreign currency.

“The bank wishes to advise the public that the foreign exchange auction trading system will be operational with effect from 23 June 2020,” RBZ Governor John Mangudya said.

“The adoption of a foreign currency auction system is expected to bring transparency and efficiency in the trading of foreign currency in the economy.”

Bidding conditions and qualifying criteria is such that the bidders will submit bids as individuals, firms and public enterprises through their authorised dealers and will submit only one bid per auction.

Analysts believe the running out of foreign currency in the formal markets was mainly due to the exchange rate and the open trading system may improve its availability.

Recently, during a visit by Finance Minister of Economic Development professor Mthuli Ncube, farmers warned that the inflationary environment caused by higher exchange rates on the black market threatened the viability of farmers.

Tobacco Industry and Marketing Board (TIMB) chairperson Pat Devenish said it (the auction system) was a step in the right direction but urged authorities to walk the talk.

“It’s welcome development but previously we have on several occasions heard the talk of a free foreign exchange market but nothing happened.

Tobacco production is expected to decline from the record 259 million kilogrammes produced last year to 224 158 million kg this season due to the reduced planted area and the erratic rains, according to second round of the crop and livestock assessment report. —