News / Local
'Zimbabwe yet to discover real exchange rate'
13 Mar 2022 at 04:00hrs | Views
Faced by persistent macro – economic instability from parallel market exchange rate volatility, Zimbabwe introduced the foreign currency auction system in June 2020.
Authorities were convinced the auction system would facilitate and expedite proper price discovery, which would in turn stabilise the exchange rate and prices of goods and services.
Nearly two years since the auction was introduced, Finance and Economic Development Minister, Professor Mthuli Ncube, believes the country is yet to discover the real price of the Zimbabwe dollar.
The Treasury chief said in an interview on the sidelines of the Insurance industry's meeting with Treasury last Thursday, that monetary authorities were still working to refine the auction market in order to discover the true value of the local currency.
"The country is in a good position, our current account position has been 4 percent in the positive for the past three years, which means we have more foreign currency inflows than outflows… so I do not understand why we are at this position, we are yet to discover the real exchange rate," said Minister Ncube.
Zimbabwe received Special Drawing Rights equivalent to US$968 million from the International Monetary Fund last year to cushion the country from adverse effects of the Covid-19 pandemic.
Consequently, The Treasury chief said the country was now sitting on foreign currency reserves of US$1,3 billion.
"You reckon we received SDRs last year, so all in all we have a total of US$1,3 billion in reserves, so we need to interrogate the situation on the ground and refine the auction system."
Despite huge reserves held by Treasury, ballooning foreign current account balances and strong export receipts, Zimbabwe continues to suffer the impact of a volatile parallel market exchange rate.
The parallel market rate has been trading at a premium to the official exchange rate, as companies are willing to pay the steep margin to access the hard currency quicker than the two-week or more turnaround time for auction funding.
Authorities and market watchers agree that some formally registered companies resort to buying forex on the parallel market due to the time it takes to obtain funds from approved auction bids.
Shortage of foreign currency also results in disbursement taking longer than expected, which resulted in a backlog of nearly US$200 million as at December 31, 2021.
"I am in constant contact with the Governor of the Reserve Bank (Dr John Mangudya), we have a meeting every Thursday and he assured me that by the end of March he would have expunged the prevailing auction backlog," he added.
The Reserve Bank of Zimbabwe has in the past issued countless warnings against foreign currency malpractices especially for businesses that benefit from the auction system.
But long delays in funding allotted bids, at times by as much as 13 weeks while only part of submitted bids would have been approved, creates another significant funding deficit.
As such, traders prefer the US dollar in order to hedge against the exchange rate risk as well as building financial capacity to retool, restock and remain viable.
A survey by The Sunday Mail Business on Thursday showed that manufacturers were pegging their prices at an exchange rate of around $240 to US$1.
Markets analyst Allen Dube said businesses were pricing using parallel market exchange rates in to cushion themselves from the cost that are informed by these market dynamics.
"The auction remains insignificant in terms of the global foreign currency supply figure in Zimbabwe and you can see this by looking at the imports versus what the auction is availing.
"This means a majority of costs such as labour and transport among others are bench-marked against parallel market rates for the majority of business," Mr Dube said.
He said ultimately, the solution to the foreign currency situation was not borrowing but increased production, improved productivity and efficient mobilisation of domestic financial resources.
The foreign exchange auction system is now in its second year following its inception on June 23, 2020.
Authorities were convinced the auction system would facilitate and expedite proper price discovery, which would in turn stabilise the exchange rate and prices of goods and services.
Nearly two years since the auction was introduced, Finance and Economic Development Minister, Professor Mthuli Ncube, believes the country is yet to discover the real price of the Zimbabwe dollar.
The Treasury chief said in an interview on the sidelines of the Insurance industry's meeting with Treasury last Thursday, that monetary authorities were still working to refine the auction market in order to discover the true value of the local currency.
"The country is in a good position, our current account position has been 4 percent in the positive for the past three years, which means we have more foreign currency inflows than outflows… so I do not understand why we are at this position, we are yet to discover the real exchange rate," said Minister Ncube.
Zimbabwe received Special Drawing Rights equivalent to US$968 million from the International Monetary Fund last year to cushion the country from adverse effects of the Covid-19 pandemic.
Consequently, The Treasury chief said the country was now sitting on foreign currency reserves of US$1,3 billion.
"You reckon we received SDRs last year, so all in all we have a total of US$1,3 billion in reserves, so we need to interrogate the situation on the ground and refine the auction system."
Despite huge reserves held by Treasury, ballooning foreign current account balances and strong export receipts, Zimbabwe continues to suffer the impact of a volatile parallel market exchange rate.
The parallel market rate has been trading at a premium to the official exchange rate, as companies are willing to pay the steep margin to access the hard currency quicker than the two-week or more turnaround time for auction funding.
Authorities and market watchers agree that some formally registered companies resort to buying forex on the parallel market due to the time it takes to obtain funds from approved auction bids.
Shortage of foreign currency also results in disbursement taking longer than expected, which resulted in a backlog of nearly US$200 million as at December 31, 2021.
"I am in constant contact with the Governor of the Reserve Bank (Dr John Mangudya), we have a meeting every Thursday and he assured me that by the end of March he would have expunged the prevailing auction backlog," he added.
The Reserve Bank of Zimbabwe has in the past issued countless warnings against foreign currency malpractices especially for businesses that benefit from the auction system.
But long delays in funding allotted bids, at times by as much as 13 weeks while only part of submitted bids would have been approved, creates another significant funding deficit.
As such, traders prefer the US dollar in order to hedge against the exchange rate risk as well as building financial capacity to retool, restock and remain viable.
A survey by The Sunday Mail Business on Thursday showed that manufacturers were pegging their prices at an exchange rate of around $240 to US$1.
Markets analyst Allen Dube said businesses were pricing using parallel market exchange rates in to cushion themselves from the cost that are informed by these market dynamics.
"The auction remains insignificant in terms of the global foreign currency supply figure in Zimbabwe and you can see this by looking at the imports versus what the auction is availing.
"This means a majority of costs such as labour and transport among others are bench-marked against parallel market rates for the majority of business," Mr Dube said.
He said ultimately, the solution to the foreign currency situation was not borrowing but increased production, improved productivity and efficient mobilisation of domestic financial resources.
The foreign exchange auction system is now in its second year following its inception on June 23, 2020.
Source - The Sunday Mail
