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'Auction rate is the real market rate'

by Staff reporter
26 Feb 2021 at 06:30hrs | Views
THE auction exchange rate represents the proper market trends contrary to the contrived perception that the parallel market signifies the "real exchange rate", a senior Treasury official has said.  

Secretary for Finance and Economic Development George Guvamatanga, said this in his remarks during the 2021 monetary policy review webinar held on Tuesday.  He said the Government was not happy with the extent of market indiscipline that has seen wanton and unjustified prices increase.

This is despite the fact that the majority of key producers and importers get forex from the auction.  Significant prices have been witnessed between December 2020 and January, and to an extent February this year, after the parallel market exchange rate rose slightly from $100 to around $110 to the US dollar.  

Following this week's auction, the Zimbabwe dollar is now trading 0,1 percent lower against the US dollar at $83,88 from $83,75. Wild price increases, which threatened to send inflation through the roof last year, were being triggered by exchange volatility, amid absence of a stable market rate.  

Mr Guvamatanga said people must move away from the conception that the open market trend is the real exchange rate because such assumption is not supported by economic or empirical evidence.

He admitted the parallel market rate should be higher than the official rate, but disagreed with huge margins that were being effected.  He said as has happened in the recent past, price dynamics over the past couple of months signify market indiscipline, which leads to potential market failure.  

Without mincing his words, the Treasury chief said the Government would not hesitate to intervene in the market to prevent failure if need be, though this was not the desired course of action.  He said as has happened with mobile network operators on mobile money, the Government is capacitated to step in and restore sanity in the event of market failure.  

"We are very much worried on the extent of the current levels of indiscipline and the Government strongly supports action by the Reserve Bank to (met out) necessary punishment for those who are abusing auction system," he said.  

He said the Government was highly concerned by the level of price increases noted over the past two months, which the authorities think is not justifiable. This is particularly the case because blended inflation figures show that it has increased by less than 5 percent during the period in question.

Mr Guvamatanga said he completely disagreed with the assertion that the major retailers were complying with the standing forex rules, "no they are not".  

He said retailers have hiked prices by 30 to 60 percent on a number of key products, and thereafter apply the auction rate to translate the US dollar price to local currency.  

Mr Guvamatanga said compliance was not about traders applying the correct auction rate when translating prices but about "what you have done to the US dollar price".  

The Treasury secretary said there was no mathematical, scientific or economic justification for wanton increase of prices, which appeared to track dynamics on the open market, regarded as the real rate.  

He railed against the belief that a certain percentage increase in the cost of key input should trigger similar margin of price hike by any business, as if that operator majors in the trading of that particular input.

Source - the herald

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