Forex auction system fails to contain price increases

PRICES of basic commodities continue to spiral and will not stabilise in the short-term as retailers are failing to access foreign currency on the Reserve Bank of Zimbabwe (RBZ)’s weekly foreign currency auction platform, sector players told the Zimbabwe Independent this week.

TINASHE KAIRIZA

RBZ governor John Mangudya told the nation at the launch of the platform last month that it would help stabilise the exchange rate, which would, in turn, result in prices of basic goods and services falling.

Since the military coup that propelled President Emmerson Mnangagwa to the helm in 2017 and the subsequent re-introduction of the Zimbabwean dollar as the sole legal tender last year, prices have been on an upward trend, with inflation currently hovering around 800%.

Although the fiscal authorities project inflation to drop to 300% by year-end on the back of a raft of measures to curtail the increase in broad money supply, Imara, a wealth management firm, forecasts inflation to peak at 1 200%.

The introduction of the foreign currency auction platform this month to stabilise the exchange rate has failed to stem the tide of a rapidly depreciating Zimdollar amid skyrocketing prices. This week, the official exchange rate stood at US$1:ZW$72,14 at variance with the US$1:ZW$120 prevailing on the parallel market.

Under the volatile currency environment, most retailers, struggling to source foreign currency on the formal platform, have defied the government’s directive to structure their pricing mechanism in line with the official exchange rate.

Zimbabwe National Chamber of Commerce chief executive Takunda Mugaga said the auction system was still in its infancy to have the immediate effect of levelling prices, in the short-term.

“This auction system has only been in operation for maybe five or six times for one to start expecting price re-discovery that will reflect market dynamics. It will be very dishonest (to project prices to stabilise in the short term),” he said. “The question is: are those retailers accessing foreign currency on the auction system? If most retailers are not accessing foreign currency on the auction system, surely you cannot argue that the exchange rate from the auction system should be the pricing benchmark.”

Mugaga warned that imposing the auction market rate could backfire and unnerve the market.He added: “It is a fact now that the major supplier of foreign currency to the auction system remains the central bank. For now, it is a one-legged animal. The supply side, your potential suppliers like your non-governmental organisations (NGOs) and your exporters are not yet coming to the party.

“You will be making one of the biggest blunders for you to say retailers and industry must adhere to the auction exchange rate. If people have confidence in the auction system, you must allow the market forces to deal with the auction rate every week in and week out. Those who are going to overcharge are bound to lose business. The auction needs to extend beyond its gestation period. For people to start expecting the auction system to reflect market prices is far-fetched.”

Confederation of Zimbabwe Retailers Association president Denford Mutashu raised concern that most business players along the value chain were restricted from accessing foreign currency on the auction platform, where the acceptable minimum bid is pegged at US$60 000.

“We held meetings last week with government and the central bank where we agreed that the general retail sector must comply with the official exchange rate. We have directly spoken to some of the bigger giants and most of them have complied. We still have some who are using a rate in the range of US$1:ZW$85. What has come out is that there has not been a huge spread of the foreign currency accessible on the auction platform for retailers, predominantly for those who fall outside the US$60 000 minimum bid,” Mutashu said.

“That continues to be of concern. We have apprised the governor on the matter. The concern is that it is not a value chain approach. We expect prices to stabilise if the number of bigger players accessing foreign currency participating on the auction platform increase.”

In the long-term, Mutashu said, the auction system could yield the intended results if it managed to attract the participation of leading retail outlets.
He said: “What we were working out was to take the bigger players from the black market. Some of the players along the value chain are not accessing the foreign currency on the auction platform.”

Owing to arbitrage opportunities arising from the currency volatility crisis, Mutashu said, consumers were being “short changed”.

“There is need for total compliance with the official exchange rate. If someone is using mobile money platforms in pricing, there is a tendency to use the rate of US$1:ZW$105,” he said.

“But if they are selling the same product in US dollars, they have a tendency of using the official exchange rate. What it implies is that if one uses the official exchange rate, the product becomes more expensive in US dollar terms and vice-versa.”

Zimbabwe is reeling under high inflation, more than a decade after it navigated from a vicious hyperinflationary spiral that decimated the value of the local currency.