MANY Zimbabweans have agreed that one of the best decisions made by the Reserve Bank of Zimbabwe (RBZ) last year was the establishment of the foreign currency auction system.
This helped the country in many ways. The auction system helped tame a runaway parallel foreign currency market, which was threatening to destroy the Zimbabwe dollar.
It is unhealthy for a country to be dominated by any form of alternative market. Today, parallel market rates have stabilised somewhat at around US$1:ZW$120, around the same rates as the formal system, which is around US$1:ZW$82.
The foreign currency auction system, as confirmed by many publicly listed firms in third quarter 2020 financial reports, created a pool of funding in the official system. This is where companies accessed reasonably priced foreign currency for importing raw materials and buying equipment. Although much ground still has to be covered to fund an industry that requires at least US$2 billion to return to full throttle, at least there was something that came out of the monetary policy.
But having said that, we are concerned by disclosures by Eddie Cross, a member of the central bank’s monetary policy committee (MPC) last week that a significant amount being allocated weekly at the auction is taken up by State firms and government departments. State firms and related institutions benefit from budgetary subsidies that most of them don’t repay. If the government is broke, it is ready to guarantee them to access foreign loans from international lenders. They also benefit from various forms of grants and donations.
In contrast, private companies are left to their own devices. For instance, last year the Ministry of Finance undertook to release ZW$18 billion in Covid-19 relief funding. Nothing came. Private companies have found most doors to international funding shut because of Zimbabwe’s high country risk, which comes from failure to settle foreign debts of about US$10 billion.
With our domestic financial system ill-equipped to meet their funding requirements, private companies are finding the going tough. No one is against the participation of State firms and government departments on the foreign currency auction system. They play a very important role in importing food, drugs, arms, surveillance devices and other critical requirements.
But we are worried that where they compete with the private sector on a platform like this, the scales are tipped in their favour. The tendency by State institutions to use their power to get funding for needless expenditure like globetrotting to international seminars and workshops is well known. These have brought no change in terms of professionalism and efficiency in the civil service, which means we are wasting resources which could otherwise be deployed to companies to produce and create jobs. This crowding out of the private sector has dire implications on the recovery of industries.
The Africa Development Bank carried out a study on this subject in Asian countries seven years ago. The results of this study were shocking. Investment inflows plummet where State firms crowd out private companies. The government should take note of this.