HomeAnalysisCurrency cushioning costly

Currency cushioning costly

By Respect Gwenzi

The interbank market has now completed 63 weekly auctions since June 2020, over which a total of US$2,04 billion has been traded or allocated. This makes for an average weekly allocation of US$32,4 million over the substantive period.

Weekly value of total trades has however scaled up in recent months, with data showing average weekly trades at US$45,2 million between July and September of the current year, a 40% increase from the US$32,4 million average, highlighted earlier.

Of the US$2,04 billion total allocation to date, 41% has been allocated to raw materials procurement, the highest allocation among competing sectors. 12,3% of the total funds allocated to date has been directed towards the SME allocation.

A fortnight ago, RBZ extended forex access to ordinary citizens, at an average of US$50 per week per person. The percentage of forex allocation to the SME market has however reduced to about 19% of total over the latest two weeks, while total allocations on the overall forex market have dipped.

Interbank market bids and rates

A number of developments are worth noting in the week under review. No allocations were made to SMEs for fuel, gas and electricity. The lowest accepted and lowest bids recorded in the latest week were the highest since the auction system began.

At 208 bids, the latest auction had the 2nd most rejected bids since the auction began.

Overall, the interbank market has continued to stabilise the currency value from a formal market perspective. It has also allowed for price stabilisation as reflected by the decline in inflation.

The stability has allowed for production ramp-ups and demand reignition as purchasing power is preserved and productivity improves. The rise in weekly allocation has also helped stimulate production in line with the expected economic rebound.

These positives have been countered by the spiraling parallel exchange rate, which is now trading at almost 100% premium to the interbank rate. The status quo cannot be left unattended for too long because of its implication to the economy and various economic aggregates which are pivotal for stability to prevail. Zimbabwe is one of the world’s most informalised economies, with informalisation levels seen in the range of 60%.

This implies that a huge section of the economy operates outside of the banking sector and unregulated, implying that these do not have access to interbank funds. The informal market therefore (for the greater part) prices its goods in hard currency and uses the parallel rate for pricing of goods in ZW$.

This is not only happening in the instance of informal businesses. A significant proportion of formal businesses adjust prices in line with the parallel rate. To evade regulatory scrutiny, operators are charging very high US dollar prices which if calculated backwards give you a figure close to the interbank. Some players will then give discounts to US dollar payments to re-equilibrate the prices. There are however formal businesses completely disregarding the RBZ directive and charging ZW$ price at the parallel rate. All these developments point towards an economy that is skating on fragile ground and may soon encounter a shock which could ground the economy yet again.

Given these dynamics, it is apparent that the centre will not hold forever.  Exporters (primary forex generators), with the exception of those exporting finished goods, estimate the variance to be a loss on potential earnings.

Earnings, which if received would have been credited 100% as forex would be trimmed depending on the magnitude of the parallel market premium. Exporters are required by law to surrender a portion of their earnings to the RBZ at the interbank rate. A fair valuation of the loss incurred would be when exporting companies estimate their ZW$ expenses.

These typically vary in line with the parallel exchange rate and therefore represent actual value loss. With the decline in export earnings comes a discouragement for production.

In the past, to counter for this known discrepancy, the RBZ introduced an export incentive which has been redeemed in the current setup. The incentive is seen as compensation for the loss of earnings arising out of a manipulated exchange rate. The incentive is however normally sub-optimal and insufficient to counter the losses arising from exchange rate variances.

To clearly demonstrate the manipulation at play in the economy, a review of the prices of goods and services in the economy is paramount.

Prices of most goods that are pegged against the interbank rate are now reflecting lower against South Africa goods of similar nature.

This is because of the effect of currency devaluations taking place through currency value loss compared to regional peers. It is also as a result of the suboptimal interbank rates that makes the end products less expensive locally. If correctly priced, Zimbabwe’s products will be more costly given that its production processes are not very efficient and capacity utilisationis low.These fundamental aspects will only be addressed through a focus on production and not on currency cushioning.

  • Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net

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