State entities dominate forex allocations, says Cross

STATE firms and government departments are collecting a significant amount of funds allocated at the Reserve Bank of Zimbabwe (RBZ)'s foreign currency auction system weekly, crowding out the private sector, according to Eddie Cross, a member of the central bank's Monetary Policy Committee (MPC).

The RBZ introduced the foreign currency auction system in June to address a dire liquidity crisis in the country.

In the final quarter of the year, several listed firms said the forex auction system had improved access to hard currencies.

Before the introduction of the auction system, companies trooped to the black market for their foreign currency requirements.

High demand on the parallel market precipitated rampaging rates of up to US$1:ZW$165 during the first quarter of 2020.

Rates have generally stabilised at about US$1:ZW$82 on the official market since June, although Cross projected last week that markets could be hit by a fresh round of exchange rate volatilities.

With allocations of about US$35 million weekly, the forex auction system presented opportunities for domestic firms to access funding for vital imports, including for raw materials and equipment.

But revelations by Cross that government agencies were crowding out private sector players could explain why industries have had to wait for up to half a month to receive their forex after allocation.

The economist also revealed this development last week.

Cross, who spoke during last week's edition of the Big Debate, said within the MPC, there has recently been a push to limit the extent to which government departments access foreign currency on the auction system.

"They are receiving quite a substantial sum in United States dollars every week and we have been arguing that some of this should be liquidated on the productive sectors, instead of being used for government purposes," Cross said in a contribution to the debate, which ran under the topic Zimbabwe 2021 Economic Prospects.

"All the critical import requirements like fuel, bulk oil, cooking oil and soya beans are all being imported now by the private sector and the auction system is providing that after a decision taken by a subcommittee of cabinet," he said.

Concerns have been rising about how State-run firms, in countries where they dominate economic activities, enjoy preferential treatment in a number of areas, including access to credit.

A 2013 African Development Bank (AfDB) paper warned against the dominance of state firms in an economy and warned about the implications of a private sector crowding out.

"State-owned firms are less credit-constrained than domestic firms and that only private firms are crowded out by higher borrowings by foreign firms," AfDB said it a report that looked at Asian economies.

"Private investment in Malaysia has been sluggish since the Asian financial crisis. One explanation is that the growing presence of government-linked corporations has been crowding out private investment," AfDB said.

Cross said the RBZ's foreign currency auction system was struggling to meet demand by the private sector, with backlogs extending to half a month.

This translated to backlogs of about US$70 million, he said.

Resources for the auction systems are being mobilised partly from the liquidation of domestic Foreign Currency Account nostros at 20% and liquidation of export proceeds retention, which is now at a mandatory 40% from the initial 30%.

"The (foreign currency auction system) arrears, which had accumulated up to the end of the year to US$70 million, about two weeks auction, we were able to clear that last week," Cross said. "We had US$34,8 million last week (the week before last) and we allocated US$35 million and this week (last week) we have been in a more or less stable situation, so for as long as we continue to meet demand on the auction system I think it will continue being the primary determinant of the official exchange rate."

Legislator and former finance minister Tendai Biti claimed the foreign currency auction system was flawed.

As a result of this, Biti said, its result was a "rigged exchange rate, which presents problems for the economy where billions trade on the parallel market".

Biti also said corruption must be dealt with. He said the central bank must stop quasi-fiscal activities that have an effect of distorting the budget in terms of the deficit.

Economist and CEO Africa Roundtable chief executive officer, Kipson Gundani warned that a managed exchange rate would lead to some point of explosion.