THE Confederation of Zimbabwe Industries (CZI) has cautioned that curtailing the increase in broad money supply, among a range of fiscal measures, would ensure the success of the foreign currency auction system introduced recently to stabilise the exchange rate.
This week, the Reserve Bank of Zimbabwe (RBZ) launched the foreign currency auction system in a bid to stem the rapid depreciation of the local unit against the greenback in a volatile macro-economic environment characterised by limited foreign currency and spiking inflation hovering around 800%. Atlas Mara has projected inflation to quicken to 1000% due to Covid-19 induced effects.
Prior to the inception of the platform, the Zimbabwean dollar (Zimdollar), which was re-introduced in June 2019 as the sole legal tender was on a free-fall, with US$1 fetching as high as ZW$100 on the parallel market.
Inaugural trading on the new platform, which replaces the interbank market fixed rate of US$1:ZW$25 saw the Zimdollar shedding nearly 80% of its value, with the prevailing exchange rate standing at US$1:ZW$57,3582 this week.
Though monetary authorities are optimistic that the platform would stem the tide of a rapidly depreciating Zimdollar and stabilise the exchange rate, CZI president Henry Ruzvidzo cautioned that without deploying a raft of robust fiscal measures, the local unit would plunge further.
In an interview with the Zimbabwe Independent this week, Ruzvidzo said: “The auction system must be complemented by supportive fiscal measures that ensure money supply remains in check and market operations are not tempered with to solve other evolving issues. Whilst stability of the exchange rate is a function of many other factors in the economy, the auction system will be a barometer that should trigger action to deal with challenges as they arise in the economy.”
He said the recently unveiled foreign currency auction system, which is one of many measures that the central bank has deployed in recent times to contain Zimbabwe’s currency volatility crisis required the “good faith” of all stakeholders to yield the expected results.
“The auction system allows for discovery of a market exchange rate and in addition is a platform for businesses to access foreign currency through formal channels,” Ruzvidzo said. “While safeguards to ensure efficient operation of the auction have been put in place, its success will depend on the extent of good faith from all stakeholders.”
Judging from trading trends on the platform which saw applications worth US$10,35 million being allotted from bids totalling US$11,4 million, Ruzvidzo said the auction system, could, in the short term, mobilise foreign currency required to meet industry’s needs.
“The results of the first auction suggest the country has demonstrated capacity to generate the required foreign currency,” he said.
“(However) the real issue has been on priorities for its utilisation. The productive sectors probably require less than 30% of the foreign currency inflows into the country to operate efficiently. The challenge therefore is how to ensure that this requirement is satisfied.”
Ruzvidzo said the “transparent” and efficient management of the auction system would help foster confidence within the trading public and help gauge the true value of Zimbabwe’s troubled currency.
“A well-functioning transparent market for foreign currency is a good first step. A move away from the many inefficient subsidy programmes that have resulted in unchecked money supply growth is another important step,” he said.
“Activities in the financial market that divert resources from production to speculation and arbitrage need to be watched and measures put in place to discourage them.”
The newly introduced auction system, which comes on the back of government’s decision to increase the salaries of civil servants by 50%, Ruzvidzo said, would inevitably set the country on a path towards redollarisation, two years after the country abandoned usage of a basket of currencies.
He, however, cautioned that an abrupt return to the dollarisation era would trigger a wave of fresh challenges such as the steep rise in the cost of doing business and dwindling exports.
Ruzvidzo said: “The economy has effectively indexed all pricing to foreign currency. What this will cause is a creeping up of the cost of doing business and reduces competitiveness of the economy. Care will be needed to ensure that exports do not decline as a result.
“With the disruption of supply chains in the region, exports have already been under stress. As companies and individuals seek to localise supply chains, competitiveness considerations take centre stage.
We may miss the boat if the cost base is allowed to balloon as happened during the previous dollarisation period.”
With most businesses now rejecting payments in the local unit, Ruzvidzo said the “widespread” usage of foreign currency on the domestic market would frustrate Zimbabwe’s smooth transition to a mono-currency mode.
“The widespread use of foreign currency in the domestic market will put pressure on the local currency further delaying the path to a mono currency,” he said, highlighting that boosting industrial productivity and exports would be part of the formula to revive Zimbabwe’s floundering economy.
Under the trading regulations of the foreign currency auction system, the platform will only accept bids of a minimum of US$50 000 and a threshold of US$500 000.
Bidders are expected to trade on the platform once every week.
The auction system will be aligned to the Reuters Forex Trading platform, a real-time electronic trading platform.