Inside the forex cul-de-sac 

Source: Inside the forex cul-de-sac | The Sunday News

Gabriel Masvora, News Editor
THE Reserve Bank of Zimbabwe (RBZ) will this week meet large producers and retail outlets to discuss rampant black market pricing of goods that has gripped the nation, and threatening to erode stability in the economy.

Over the past few weeks, the nation has been rocked by a sharp rise in black market activities which have seen foreign currency rates rising to as high as US$1 to $200.

The highest rates were obtained in Harare with Bulawayo black market dealers selling the US dollar at US$1 to $180 as of last week. Retailers have followed suit disregarding official exchange rates and pegging prices at the black market rate.

This has resulted in a sharp increase in prices of goods and erosion of income for most workers, especially those that are paid in local currency.

A survey is shops in Bulawayo showed that retailers were wantonly increasing prices and even those displaying official exchange rates do not apply those at their till points.

RBZ Governor Dr John Mangudya told Sunday News yesterday that he will meet retailers as part of many other measures lined up seeking to arrest the rampant mischief that has gripped the economy.
“The Bank is therefore proceeding to further tighten the growth of money supply, refining the auction system to ensure that there would be no auction backlogs and dealing with outliers.

The Bank is also arranging to meet the larger producers and larger retail outlets this coming week to map out the best way to ensure that stability within the economy is restored, as almost everyone in the economy seems to be followers of the parallel exchange rates without anyone accountable for it. Meeting the business community is therefore essential for the benefit of everyone and the economy.”

Dr Mangudya said the ugly head of the volatility of the parallel exchange rates was now undermining the stability gains the country witnessed over the past 12 months as evidenced by the reduction of inflation from 837 percent in July 2020 down to 50 percent in August 2021.

He said the volatility of the parallel rates has nothing to do with economic dynamics or fundamentals but was being caused by behavioural dynamics, especially rent seeking behaviour capitalising on people’s past experiences with hyperinflation and dollarisation.

“The instability of the parallel rates is not beneficial to business and consumers as it makes business difficult to run whilst the high implied rates erode consumers’ purchasing power of their incomes or money. The high rates have negative pass-through effects on inflation.”

Dr Mangudya added that while the auction rate was determined by forex bids submitted to the Bank by entities through their bankers, the parallel exchange rates seem to be a result of competition to get forex at all cost without regard to the numerous downside risks to the economy, business and consumers.

“That behaviour is attributable to rent seekers for arbitrage opportunities or for socio-political reasons.”

Confederation of Zimbabwe Retailers president Mr Denford Mutashu told our sister publication Business Weekly last week that business including retailers must be responsible and price their goods responsibly. He, however, said there was also a huge demand of foreign currency by those retailers who sell mostly imported goods.

“Some of them do not access foreign currency at the auction rate and are forced to seek it on the black market hence the huge demand,” he said.

However, even some companies that are getting forex from the RBZ auction, are allegedly abusing it and there is a need for the Government to carry out audits and punish such companies, added Mr Mutashu.

Sunday News also sought views from experts on the sudden volatility that has gripped the forex exchange especially the black market. Mr Julius Tapera, an Economic Analyst, Strategic and Management Consultant, Assistant to Vice-Chancellor at Lupane State University (LSU), commenting on why RBZ rate and black market rates were worlds apart said;

“There are a number of contributing factors. Speculation is contributing to the widening of the gap between the official and parallel market rates. Some companies are getting foreign currency from the auction at the official rate but still price their goods at parallel market indexed prices.

On the other hand, the constrained supply side is inhibiting the full play of market forces in determining the real value of the ZWL against the USD. The limited supply from the official market is also forcing some businesses to resort to the parallel market to source foreign currency to import raw materials. This also contributes to the market distortion.”

Mr Nkululeko Mpofu, an Economics Lecturer at LSU, said one of the solutions was to bring many players in the market place of fuel, agriculture, mining and tourism. Miss Agatha  Changau an economist and former lecturer at a local university said government should consider “backing up the local currency to gold”.