Forex backlog dents machinery imports

ZIMBABWE'S industries are still battling to access millions of United States dollars allocated through the foreign currency auction system, Confederation of Zimbabwe Industries (CZI) president, Kurai Matsheza told NewsDay Business yesterday, warning that the backlog had exacerbated an already dire industrial machinery crisis.

The foreign currency auction system ran into problems about a year into existence last year, amid reports that the central bank was struggling to honour allocated funds.

At one point last year, the CZI said firms were owed over US$200 million.

However, the Reserve Bank of Zimbabwe (RBZ) said in the 2022 Monetary Policy Statement it would ensure settlement of auction bid allotments within a period of two weeks.

"Our members are currently sitting on some huge backlogs in terms of monies allocated at the auction," Matsheza told NewsDay Business.

"Businesses have got to survive and can't wait for long to really bring in whatever, be it equipment or raw materials. Obviously the reserve bank has got to allocate what is available so that these backlogs do not grow," Matsheza said.

"But, as they actually auction what is available, the official exchange rate will also move to reflect that stance. So, as long as they continue allocating what is not available the official exchange rate will remain depressed and not a true discovery mechanism for a true auction rate."

He said if the RBZ refined the auction to a true price discovery mechanism, rather than an allocation system, the premium between the auction forex rate and parallel market would narrow or disappear.

As a result of the auction backlog, companies are turning to the parallel forex market to source foreign currency as seen by the increase in companies raising prices of goods and services in response to the parallel rate.

The exchange rate stands at about US$1: $250 on the parallel market.

In contrast the official market rate is at US$1:$134.

"In February 2022, four auction trades were conducted by RBZ with the Zimbabwe dollar shedding a cumulative 7,11% of its value relative to 5,94% attained in January 2022. About US$148,71 million was allotted on the auction market in February 2022," the Zimbabwe Coalition on Debt and Development (Zimcodd) said in its new February 2022 monthly economic reviews.

"In the parallel market, the local unit slid by 8,9% from an average of $220 in January 2022 to $230 by end of February 2022. Since almost all businesses are benchmarking local prices at the black market rate, the continued decline of the Zimbabwe dollar on the black market entails high inflation via the exchange rate pass-through effect," it added.

Zimcodd said this was one of the major drivers of inflation in Zimbabwe since 2019.

"In its 2022 Monetary Policy analysis, Zimcodd highlighted that there is a possibility of insider trading at the auction and the deliberate manipulation of the exchange rate by the RBZ since it is the sole supplier of forex on the auction market," Zimcodd added.

As at December 31, 2021 RBZ had successfully conducted 77 main and 71 small to medium enterprise auctions from its inception.

In 2021, US$1,97 billion was allotted, representing 97% of total bids submitted to the auction.

This amount represents around 30% of total foreign payments processed by banks in 2021, according to the central bank.