Forex rate premium falls

THE parallel market exchange rate premium has fallen below 50 percent, as policy interventions by the Government continue to drive appreciation of the Zimbabwe dollar, but pockets of resistance remain among some illegal currency traders due to fear of the inevitable significant losses.

The authorities, however, expect the sustained strengthening of the exchange rate and prevailing stability to send a clear message to the market that stability will be durable, a situation that will leave the speculators with little option, but to adjust to the new order.

In response to the weakening Zimbabwe dollar exchange rate at least two months ago, Treasury and monetary authorities, rolled out a series of policy interventions to mop up excess local currency liquidity, blamed for driving exchange rate volatility, from the market and ensuring efficiency of the official foreign currency market.

Key interventions included a directive for all import duties to be paid in Zimbabwe dollars, except for luxury items; transfer of external payment obligations from the Reserve Bank of Zimbabwe (RBZ) to the Treasury; and introduction of the wholesale foreign currency auction for banks.

Fees and charges in the local currency

Further, the Treasury also demanded that all Government institutions must collect fees and charges in the local currency and 50 percent of corporate tax payments to be made in Zimbabwe dollars, while the central bank raised its bank policy rate from 140 to 150 percent.

Coupled with the liberalisation of the exchange rate regime, the official and parallel market rates responded by rapidly depreciating before stabilising. The official rate went on to post gains against the greenback.

At one point, the exchange rate premium fell to about 25 percent from over 100 percent previously, after the Government started implementing interventions to stabilise the rate and price increases.

But the disparity again widened a bit last week, and only because the Zimbabwe dollar official exchange rate continues to gain against the US dollar, while the open market rate remains intransigent, with some traders maintaining positions in the hope the strengthening will be short-lived.

For instance, traders who bought forex when the parallel exchange rate shot above $7 000: US$1 are staring at the real prospect of heavy losses if they sell at any price below that threshold, after the domestic unit registered two consecutive gains on the wholesale foreign exchange market for banks last week.

The movement of the parallel market rate is a critical factor in the pricing models of local businesses, which peg their local currency prices to the greenback, which results in price increases each time the exchange rate depreciates.

RBZ monetary policy member Mr Persistence Gwanyanya said it was expected that illegal foreign currency traders who bought their money at the previous high exchange rates would hold on to the elevated exchange rates in the hope things would unravel.

"They had taken positions; to unwind these positions and liquidate foreign currency at the new rates following firming up of the Zimbabwean dollar, they feel they will lose.

"It is normal that they think it is going to be temporary, which I do not think it is. This period is normally characterised by resistance because the (economic) players fear losing, as they had taken positions when the exchange rate depreciated significantly.

"There are some who believe this is going to be temporary and others who are still receiving payments at the previous (elevated) exchange rate . . . (they) involved someone before firming up of the Zimbabwe dollar . . . and are still receiving the payment.

"Those can still afford to buy the foreign currency at those high (exchange rate) levels, but we see that as short-lived; it is not going to be permanent and what is interesting is that when the trend of the firming exchange rate persists, most likely, the reaction is that, even those who are resisting, will be forced to liquidate at one point," Mr Gwanyanya said.

A time will come, Mr Gwanyanya said, when voluntary forex liquidations will happen and this will be "en masse", resulting in the convergence of exchange rates, leading to equilibrium.

The Government is determined to see the prevailing macroeconomic stability sustained after its policy interventions successfully mopped up more than $300 billion from the market and injected roughly US$60 million.

The Permanent Secretary for Finance and Economic Development, Mr George Guvamatanga, in a strong indication of the Treasury's determination to prolong the stability, demanded all economic agents to align their prices to the new official exchange rates. He said the Treasury will not process payments for suppliers to the Government who do not comply with the new order, especially as this relates to the value-for-money principle.

Mr Guvamatanga dispelled the notion that stability had been achieved at the expense of paying contractors for public works.

". . . we will not pay suppliers invoicing at $8 000: US$1 or above until they align to the prevailing exchange rates but those who are complying are being paid."

Commenting on the exchange rate stability, Zimbabwe National Chamber of Commerce chief executive Mr Chris Mugaga said, while the stability was noticeable, at least a year was needed to ascertain its durability.

"It's a journey; you cannot measure it over two or three months," he said.

Mr Mugaga said the issue of tight Zimbabwe dollar liquidity was only a short phase that should be resolved once contractors and exporters are paid, the latter for the 25 percent mandatory liquidations.