Latest News Editor's Choice

News / National

Mthuli Ncube walks tightrope

by Staff reporter
09 Jul 2021 at 12:07hrs | Views
ZIMBABWE'S industries have asked Treasury to inject funding into the central bank's forex auction system to help it clear backlogs of up to two weeks and clear market distortions.

Confederation of Zimbabwe Industries (CZI) chief executive officer Sekai Kuvarika told businessdigest this week that the auction system was key to the country's ability to sustain a fragile stability enjoyed since its return a year ago, after faltering in 2004.

"Our key request is that the mid-term budget should not unsettle the stability or the relative stability that we have experienced, but rather sustain it," Kuvarika said.

"The auction must achieve its price discovery role because clearly, the supply and demand situation is now distorted. That distortion is expressing itself in delayed settlements."

When it was introduced, the forex auction was meant to act as a price discovery mechanism and help businesses access cheaper forex on the formal market after a parallel market rage had pushed industries to the brink.

On the last update in February, almost US$800 million had been secured through the system, which had closed the gap between the black market and the official exchange rate.

But it has been undermined by supply and demand hurdles that have sparked off serious distortions as allotted bids take longer to be settled.

The Reserve Bank of Zimbabwe's plan is under threat of railing off track as the auction system lags behind in price discovery and is struggling to clear an almost fixed rate.

The market has since been overrun by the parallel market, which the CZI said can be diffused through significant Treasury interventions bolstering its capacity to fund companies' forex requirements.

"The forex auction market should be made more liquid with support from Treasury to avoid delays in bid settlements," the CZI said in a paper sent to the government ahead of the mid-term budget statement expected this month.

"Delays in bids settlement have been undermining the efficiency of the auction market. Companies' working capital will be tied-up in delayed settlements affecting the smooth operations of businesses. We feel strongly that we are close to achieving overall macroeconomic stability, necessary to power sustained recovery and growth.

Delays in settlement on the auction allotments for extended periods have been affecting companies' working capital and this has slowed their recovery. The increasing premium between the official exchange rate and the parallel market rate is a cause for concern. The risk is that the economy can readily slide back into hyperinflation as a result of the widening parallel market premium."

Finance minister Mthuli Ncube is yet to indicate when he will deliver the blueprint.

But he is walking on a tightrope.

Zimbabwe has been hit by a worsening Covid-19 third wave, which is threatening his plan to expand gross domestic product by 7,4% this year through interventions that include pinning down inflation to less
than 10% by December.

But he faces an agitated civil service that has been building up pressure for pay hikes, a situation that could spark an inflationary surge.

The urge to increase or come up with new taxes under the dire circumstances could be high. But in a series of interviews this week, economists and industrialists requested that he holds his guns.

In addition, Ncube will be under pressure to push through a decade-old plan to privatise and wean off resource guzzling state firms.

"We expect welfare grants to increase because of the Covid-19, which has disrupted the informal sector as well as the lives of the general public who were surviving on the informal sector," economic analyst Stevenson Dhlamini told businessdigest.

"We expect a review of salaries for civil servants to be cushioned against inflation. He has highlighted that inflation has gone down in a previous budget but now he also has a surplus but in the presence of that surplus we are having civil servants failing to catch up with cost of living. We are also expecting greater expenditure on the health sector. This pandemic is going up, so we expect him to boost the health delivery system. On taxes, we don't expect any changes, they are already too high."

Added another economist, Victor Bhoroma: "State-Owned Enterprises can only reform once corruption is dealt with decisively, Auditor-General reports are taken seriously and when there is political will to reform them. I don't expect much, maybe that so and so consultants or advisors were hired to look into a certain SEP or help in the privatisation/realignment process." — Additional reporting by Mthandazo Nyoni and Fidelity Mhlanga.

Source - the independent