Industry wants stable currency

Source: Industry wants stable currency | Sunday Mail (Business)

Golden Sibanda

CAPTAINS of industry and economists want the Government to actively work to converge parallel and official exchange rates in order to stabilise the Zimbabwe dollar.

Over the past few weeks, the local unit has lost some ground against the US dollar on the auction market.

The Reserve Bank of Zimbabwe continues to insist that it does not influence the direction of the exchange rate as it is market-driven.

The Zimbabwe dollar quickly depreciated soon after its introduction in 2019 after a 10-year hiatus.

It had been abandoned in 2009 as hyperinflation took its toll.

In February 2019, a managed floating exchange rate of US$1:$2,5 was adopted.

The central bank, however, argues that under the Dutch Auction System, which was introduced on June 23 last year, the exchange rate is determined by the market on the basis of the weighted average of approved bids.

In recent weeks, the value of the local unit has moved to $105,669 to the greenback.

Confederation of Zimbabwe Industries (CZI) president Mr Kurai Matsheza told The Sunday Mail Business that the exchange rate needs to continue to reflect market sentiment.

“Obviously, in terms of the outcome of the market exchange rate, my view is that this is a market behaving that way; people bidding and that (depreciation on the auction) is the outcome of those bids,” he said.

“We have no role to play (as industry). We just accept the outcome from those bids; that’s the market discovery.

“As to the trend, the position of industry is we expect there to be a convergence between the auction rate and the parallel market rate.

“Confidence on the parallel rate has got to come in to make sure the gap does not widen; it needs to be narrowed. Obviously, if there is a runaway, we get worried because that will also filter into the economy and drive prices up.”

Mr Matsheza said a volatile parallel market rate was troublesome for industry.

“The parallel market rate is obviously a worry to us and whoever is misbehaving in that direction and driving that rate, we are not in support of those actions.

“We want convergence (between official and parallel market rates); as I said earlier, this will drive the price of goods and services up, and it is not good for everyone,” he said.

It was critical, he added, to continue to create an environment where importers were free to submit bids of what they thought was the fair value of the local currency against the US dollar.

The RBZ-run auction has become the biggest source of foreign currency for importers, having disbursed over US$1,7 billion since inception.

Economist Mr Eddie Cross said over the last few weeks, authorities have been cutting odd bids below a certain bid rate if there wasn’t enough forex to cater for all bids.

This, he said, was the fundamental reason why the local currency had depreciated to about US$1:$105.

He, however, noted that the gradual depreciation of the domestic unit on the auction provided the basis for conditions required to achieve rate convergence.

Economist Mr Persistence Gwanyanya said the movement of the official exchange rate reflected the bidding process of market players.

“The people (importers) are studying the market and bidding, and their behaviour is what is reflected in the exchange rate. It is important because we want the exchange rate to find a new equilibrium.

“If we control the exchange rate, that will not happen. We want an equilibrium between the two (parallel market and official market),” Mr Gwanyanya said.

He said for as long as there is stability in the official and parallel market rates, the country would have achieved the desired equilibrium between the two markets.

“What is important is not whether the exchange rate has depreciated to a certain extent, but whether the exchange rate is stable,” he said.

“The movement of the official exchange rate could be a reflection of the need now to find new equilibrium in respect of the official exchange rate.

“What is important also about this is that it is going to restore the stability (in the exchange rate).

“The obvious worry among people is whether that depreciation is not going to stock inflation.

“My view is that it won’t because most of us have not been pricing at the official exchange rate, but somewhere in between or at the parallel market rate.

“We must also be wary of the competition in the market now; that we cannot continue to increase prices without consequences; there would be consequences.

“I do not see any inflationary pressures forming out of the depreciation of the exchange rate, but I see it strengthening the stability of the exchange rate . . . restoring the equilibrium,” he said.