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Govt cracks down on speculators

by Staff reporter
13 May 2022 at 19:02hrs | Views
GOVERNMENT is clamping down on big corporates, which borrowed billions of Zimbabwe dollars and used the money for speculative activities while taking advantage of exchange rate movements to push up prices and participate in illegal trade in foreign currency.

Fiscal and monetary authorities say after a series of meetings last week, President Emmerson Mnangagwa last Saturday announced a raft of interventionist measures, including suspending bank lending in a bid to rein in companies, which borrow money for speculation and arbitrage.

This involves buying goods and pricing them above parallel markets rates and securing hard currency to swiftly pay off their loans cheaper and stash their United States dollars stocks, while making huge profits.

Finance and Economic Development Minister Mthuli Ncube on Tuesday said authorities were investigating the extent of malfeasance by certain economic agents and would swoop on offenders once they have ascertained the level of wrongdoing.

"First of all, we have some information, some leads as to the kind of speculation that was taking place, in the equities market and also through the banking sector, that is why we have stopped banking lending, for now, temporarily.

"We have some information, we have some leads and we have started the investigation process, we have brought any charges yet, we are still investigating, once we have completed those investigations and ascertained the level of wrongdoing, then we will bring the charges," Minister Ncube said.

Big local corporates and speculative borrowers with huge balance sheets are reportedly driving the exchange rate volatility and steep currency depreciation as they make billions from arbitrage activities, a top fiscal official in the Government said, preferring anonymity.

"Speculative borrowers are responsible for driving the exchange rate in the parallel market for their final gains and in so doing pushing unsuspecting consumers who are bearing the brunt of unjustified inflated price increases.

"By depreciating the local currency, say from US$1:$250 to US$1: $350 within a month, the company or speculative borrower would have easily made an arbitrage profit of more than $300 million from a loan of $1 billion, for instance.

"They are minting money in both local and foreign currency. So the higher the borrowing the higher the arbitrage profits. The model is low-risk or riskless, but highly profitable at the expense of consumers and the economy. This
destabilises the market and the economy.

"It is against this exploitation and manipulation of the financial system and abuse of the general public through stoking inflation that the executive, fiscal and monetary authorities decided to put some temporary freeze on lending to allow for sanity to prevail.

"It's a suspension, hence it will be lifted when currency speculators have been contained and stability on the currency and exchange as well as confidence have been restored.

"The deliberate and profit-driven manipulation of the exchange rate – or burning as they call it in street lingo – by corporates and speculators who are supposed to be responsible citizens is indiscipline of the highest order and counterproductive, which should be a punishable offence under financial crimes.

Following the measures and its meeting with bankers this week, the Reserve Bank of Zimbabwe said: "In the wake of manipulation of the exchange rate by some borrowers of large amounts to the detriment of consumers, the (central) bank reserves the right to publish the names of significant borrowers across the banking sector in the
public interest."

The Government insists it is big companies that are driving currency depreciation and the exchange rate drop, which in turn stokes inflation and destabilises the market, while leaving consumers battered by skyrocketing prices even more

Prices in Zimbabwe have of late been increasing at an alarming rate, further squeezing the people whose incomes have been eroded by resurgent inflationary pressures.

The annual inflation rate in Zimbabwe climbed to 96,4 percent in April of 2022 from 72,7 percent in March, reaching the highest since last June. Main upward pressure came from prices of transportation (106,1 percent vs 84,3 percent in March), of which fuels and food (104 percent vs 75,1 percent), as the Russia-Ukraine war has led to bread prices soaring in importing countries like Zimbabwe. On a monthly basis, consumer prices jumped 15,5 percent, the most significant movement since July of 2020.

In a bid to contain money supply growth, further exchange rate decline and rising inflation, the Government came up with measures which it says are expected to restore macroeconomic stability and deal with market indiscipline.

President Mnangagwa said the increase in month-on-month inflation from a monthly average of 4,5 percent to 15,5 percent in April 2022 was significant. He said such an increase in domestic inflation was caused by both recent global shocks and domestic factors.

In the televised speech, Mnangagwa said domestic factors which include the pass-through effects of the recent exchange rate depreciation on the parallel market are wreaking havoc with the economy.

"If not contained, the continued depreciation of the domestic currency against the US dollar may lead to a reversal of economic stability gains achieved since the introduction of the foreign exchange auction system in July 2020," he said.

The President further said his Government was convinced that the recent exchange rate movements were driven by negative sentiments by economic agents as opposed to economic fundamentals.

He was referring to big companies that have borrowed billions, which his Government accuses of using the money for speculative activities.

"These negative sentiments have been propagating adverse expectations on future inflation and exchange rate movements, thus giving rise to artificially high demand for foreign currency as economic agents hedge against expected
high inflation," he said.

Fiscal and monetary authorities say as a result big corporates have been targeted over their borrowing and speculative trading activities, hence the freezing of lending which is a dough-edged sword as it also hurts companies through
unintended consequences.

While some companies are complaining about these measures, especially suspension of lending, others think they will restore macroeconomic stability, support economic recovery trajectory, boost economic confidence, increase the
appeal of the local currency, preserve value for depositors and investors and deal with market indiscipline.

However, captains of industry say while it is important to deal with the situation, piecemeal measures won't work.

"The interventions are understandable, but the problem is that they are a double-edged sword; they cut both ways," an industrialist said.

Currency changes resulted in value erosion on bank deposits of the banking public. Government said it will compensate individuals who had funds in their bank accounts of US$ 1000 and below as of January 31, 2019.

President Mnangagwa said that a framework is being created to compensate individuals who had figures of up to US$100 000.

"The amount required and implementation modalities of this policy will be announced in due course guided by the Public Debt Management Act and Reserve Bank of Zimbabwe," he said.

The other measures included clearance of foreign auction backlog, continuation of partial dollarisation (dual currency system), exchange rate management and allowing retailers and wholesalers to benchmark their pricing to the average
interbank rate with a maximum allowable variance of 10 percent.

The Government has also come up with additional measures to strengthen demand for local currency, including allowing exporters to pay taxes using local currency, although this said this was under review, and tax incentives for using local currency.

Source - The Herald