Government has plans to overhaul the country's interbank foreign exchange market amid concerns that the current system is fraught with irregularities.
For central bank authorities, the move is an admission that the interbank market which was introduced in February is not very efficient.
Nearly 10 years after the introduction of the multicurrency system, the adoption of the interbank foreign exchange system effectively devalued the local currency which was initially pegged at par with the United States dollar.
While the liberalisation of the foreign exchange market was a step in the right direction, we continue to argue that the decision was ill-timed and not backed by the right fundamentals.
The fundamentals include a minimum of foreign exchange reserves equivalent to one year of import cover, now said to be less than one week’s import cover, according to credible sources at the central bank. Mangudya did not respond to enquiries on the foreign exchange reserves yesterday.
The other fundamentals are that Zimbabwe should have a balanced and sustainable government budget, high consumer and business confidence, a sustainable level of inflation, and a healthy job market. All these have not been met.
The foreign exchange policy has failed to deal with the economic crisis as Zimbabwe’s current account remains in a precarious position. The greenback has remained an elusive commodity and increasingly some formal businesses are relying on the parallel market to meet their foreign currency demands.
The official rate on the market as at close of business yesterday the interbank rate stood at 16:1 against the black market rate of as much as 22:1 against the greenback.
According to the central bank some banks are selling foreign currency at ZWL$30 for US$1, which on one hand speaks on manipulation of the system and supply side gap on the other hand.
From February 22, 2019, to October 11, 2019, cumulative interbank purchases amounted to a lowly US$173 million, while total sales amounted to US$165 million.
With the new interbank market, the government expected it to provide significant positive effects on the economy and domestic production, which is currently very low.
Zimbabwe’s economy has been on a serious downturn in the past two years - being ravaged by hyperinflation, cash shortages, and fuel and electricity shortages.
The southern African nation has also missed several of its macroeconomic targets. The government has been targeting an economic growth rate of 3.1% by the end of 2019. But there is economic recession, and the economy is expected in fact to contract by 6.5% this year. There is runaway exchange rate volatility when the government was targeting inflation to be around 5% by year-end. With annual inflation hovering around 400 percent, a rebound in 2020 is highly improbable. Let us go back to the basics.
The Monetary Policy Committee, which was appointed a few months back, held its first press briefing where plans to attain macroeconomic stability were announced. Reserve Bank of Zimbabwe governor John Mangudya who chairs this meeting announced that the central bank would within the next fortnight inject new domestic bank notes and coins to ease the cash system.
His boss, Finance minister Mthuli Ncube later in the day said authorities would pump in notes into an economy where notes are currently being sold for a premium as high as 60%. The setting of the MPC is one of the few steps in ensuring the independence and integrity of the apex bank.
In the past and to some extent now, there has been a thin line between the executive and the central bank and this has dampened confidence in a key institution whose role is to ensure stability of the financial services sector. During the hyperinflationary era for instance, the central bank went on overdrive printing new notes before the market rejected the increasingly worthless units.
Interesting revelations where also made by the committee which should serve to improve operations of the central bank amid growing resentment.
The MPC noted that the increase in reserve money by 80% during the first 8 months of 2019, when compared to the December 2018 position, caused instability in the exchange rate and resulted in the increase of domestic prices of goods and services.
The independent committee said measures to ensure money supply growth is contained within levels that will ensure exchange rate stability should be adopted. This would be an acid test given wage demands by the civil servants demanding salaries to be indexed against the United States dollar. Gold producers, who have been selling the commodity to side markers are also demanding a fair price for the metal. Should treasury give in to some of these demands we see money supply growth rising rapidly, a development which is inflationary.
Official figures indicate that there was a decrease in reserve money by 10 percentage points in September 2019 from the August position and authorities have agreed to continue on this trend to ensure that reserve money growth is contained to 50% for the full year 2019. Again with no budgetary support to fund critical government projects such as agriculture facilities for the vulnerable, the central bank could again be forced to turn on the printing press in no time.
The committee also noted that the unequal distribution of money supply, which is heavily skewed toward few corporates is the main challenge within the economy as opposed to the general level of money supply. This is on the basis that the majority are struggling to afford basic commodities and banks are also constrained by their liquidity levels, while the productive sectors are short of liquidity.
As we have pointed out in our previous analyses, Zimbabwe road to recovery will not be an easy one unless government fully supports productive sectors. Distribution of money supply to few companies has created arbitrage opportunities that have resulted in instability. So going forward, it is our view that the autonomy of the central bank under the guidance of the MPC may help in containing money supply.
As Zimbabwe slides into hyperinflation, there has been mistrust between government and business. Forget the much-hyped Tripartite Negotiating Forum which was revived early this year—prices in Zimbabwe are now rising weekly with some daily.
The manufacturing sector which is operating sub-optimally due to antiquated equipment, high production costs and erratic power supplies is in limbo and cannot match regional peers.
During a mock survey carried by out by Econometer Global Capital we observed that most businesses are now on survival mode and have adopted the cost recovery pricing model in this inflationary environment. For instance a 900W generator for home use which would cost USD100 was last priced at ZW$2500 at a time the parallel market exchange rate was hovering around 1:19. That has been the case in supermarkets where prices indexed in Zimbabwe dollars are now twice expensive as those in neighbouring South Africa.
This points to an unstable and rising cost structure, frequent repricing of goods and a subsequent decline in the quality of earnings for business.
President Emmerson Mnangagwa recently met local retailers over price hikes but the blame-game prevailed. Manufacturers blamed retailers and vice versa.
All this points to structural deficiencies in the economy. Local industry cannot export due to some of the factors alluded above and hence their pricing model has been designed to ensure that they do not trade out of business. Yesteryear memories of consumers becoming bargain hunters, a development that resulted in retailers failing to restock remain fresh. However unlike in the past Zimbabwe’s inflation is not being driven by excessive money supply (notes in circulation) but an unstable currency, government’s fiscal indiscipline and a general lack of confidence.
While doing so, inflation has been heading northwards, tracking foreign exchange movements and price of fuel.
Resultantly buying power has diminished. With low exports, high production costs, this will be a vicious cycle for the economy.
Officially, month on month inflation has slowed down but our analysis shows otherwise. A kilogram of commercial grade beef which would cost USD5 is costing ZWL$120 for the same unit.
In the past the price of a dozen of eggs would track US dollar movements but now low buying power has made this benchmark inaccurate. So in the final analysis, we can conclude that while business is on survival mode, it has also taken two extra steps to ensure that it continues to restock and maintain the going concern status. Authorities and business will not have a convergence point unless the macroeconomic environment is stabilised. Doing so requires Zimbabwe to go beyond the Open for Business mantra and overhaul the business climate for both domestic and foreign investors.