The Confederation of Zimbabwe Industries (CZI), which groups some of the country’s biggest companies, says industry was on the road to recovery, but recent government regulations on forex now threaten the progress its members have made.
Under SI127, the government imposed fines on companies that set prices above the official exchange rate. CZI says the SI must be suspended to allow for dialogue between government and business.
Here, we publish excerpts from the CZI’s reaction.
CZI believes that SI 127 should be immediately suspended. CZI agrees with the issues that the Ministry of Finance is trying to resolve; control inflation, eradicate the use of the black and informal markets, bring stability/sanity to the foreign currency markets, and prevent abuse of the foreign currency obtained on the auction for profiteering and other opaque activity.
It is our submission that the SI127 does the exact opposite of the above and indeed will; reduce the amount of foreign currency in the official and formal channels, create USD inflation to achieve a perceived required return by business, bring businesses that previously were able to generate forex into the auctions.
These organisations were able to collect foreign currency from sales previously.
The market believes that the auction is a controlled rate and therefore from the past we have seen that it looks for another reference point to determine a price. That will mean we are back to the dark days when the black-market rate anchors pricing. This market has thin volumes and is driven by rumours and speculation.
SI127: Policy scenario and impact
Over the past nearly 12 months since the launch of the Foreign Currency Auction, the economy has witnessed much progress, notably due to the stability engendered and occasioned by the Dutch Foreign Exchange Auction system.
As a result of the Auction system, exchange rate predictability, and growing access of foreign currency through the formal system, the formal positive outcomes were realised: collapse in adverse expectations, narrowing of the alternative exchange rate premium, falling month on month inflation (from 35.5% in July to 3.2% in November 2020), increase in local industry capacity utilisation, increase in locally manufactured goods, increase in USD deposits in the banks, fiscal revenues growth, steady Recovery in domestic demand, business Volumes growth and exports growth.
Forex auction impact on inflation
The initial impact on headline inflation has been most pronounced, with month-on-month inflation decelerating from above 30% in June/July to an average of 2.2% for the months March through to June 2021.
On current trends, headline inflation was on course to decline further to 55% by July and 30% by December 2021.
The policy scenario of sustained inflation decline is achievable. This would be buttressed by a strong fiscal policy stance and tighter monetary policy.
Industry has been ramping up production since the relaxation of lockdowns, with very real prospects of positive growth being achieved by year-end. Agriculture has had significant growth across key subsectors, following the good rains. Employment figures have been rising on the back of a stable environment since June 2020.
Risks to current policy
The forex auction system was put in place as a price discovery mechanism and to avail foreign currency on the formal market. In its active price discovery, the Auction system quickly started to close the gap between the auction rate and the parallel market rate without driving up the parallel rate.
However, when supply and demand became somewhat distorted at the auction when all demand was allocated but settlements significantly delayed, this signalled that the auction had now lagged behind in price discovery and was now operating at an almost fixed rate that it could not clear, the parallel market rate picked up.
It is important for the auction to stay the course of price discovery and eliminate the margins that are an effective tax on exporters who surrender part of their earnings to the auction as this would also encourage forex generators to come to the auction and improve its liquidity.
As CZI, we feel strongly that we are very close to achieving overall macroeconomic stability, necessary to power sustained recovery and growth. Both market and policy deficiencies can be addressed without jeopardising that trajectory with a heavy-handed SI which will likely reverse the gains of the past year.
We understand and appreciate Government concerns for stability and the frustration with some aberrations by a few corporate entities which access FX at the Auction rate and yet price at the alternative market rates. This is not representative of the entire industry, and we believe engagement between industry and Authorities can resolve such aberrations.
The industry body does not support such behaviour in any way, but we also believe it does not warrant the blanket SI which has far reaching adverse implications for the economy.
Pursuant to the foregoing, CZI therefore calls for urgent dialogue with Ministry of Finance and monetary authorities to map out a way forward.
While the intentions of government in promulgating the SI are noble and appreciated, there are some unintended consequences that we see resulting from the application of the SI. These include the following:
The immediate impact of applying the SI would be that US dollar prices will be hiked so as to result in the same ZWL price prevailing prior to the SI. This means an immediate spike in USD inflation, a component of our blended inflation rate.
Companies have been relying on local US dollar sales to generate the bulk of foreign currency used to sustain operations. Use of the auction rate would result in consumers converting their US dollars to ZWL on the parallel market prior to purchasing, a practice already rampant outside the major retail chains such as Pick n Pay, OK and Bon Marche.
This will deprive companies of what has become their main source of foreign currency.
Demand for foreign currency on the Auction is going to increase significantly as this becomes the only source of foreign currency in the absence of domestic sales in US dollars.
There is not likely to be a corresponding supply side increase in the amount of US dollars coming onto the auction, which will either result in an increase in the delays on disbursements, or a sharp increase in the rate.
To date, our members still have their allocations on the auction pro-rated, thus a surge in demand on the auction is likely to exacerbate this problem and cause a slowdown in the economic recovery and job creation witnessed to date.
Goods such as fuel are priced in USD and companies cannot bid for local payments at the auction. Inability to sell in US dollars locally will thus cause supply chain issues unless service stations are also compelled to sell fuel in ZWL at the prevailing auction rate. Such a pronouncement however has led to fuel shortages in the past and thus is undesirable.
CZI recommends that implementation of the SI be suspended, and urgent stakeholder consultations be held between government and business to come up with a way forward that will not jeopardise the rebound witnessed in the economy to date.
Some of the issues we believe government needs to take into consideration are:
Confidence is at the centre of all fiat currencies, and it is important to avoid policy misperceptions that may result from well-intentioned Statutory Instruments.
The path to de-dollarisation must be more clearly defined and will need stakeholder buy in along the way for confidence.
It is important to address deficiencies observed on the auction, which include delayed settlements arising from more currency being sold than is available. There needs to be confidence in the auction or a formal foreign currency market before driving towards a mono currency. We have already witnessed the unintended consequences of a premature push towards a mono currency in the past two years.
It is important that we move to a single exchange rate at which the entire economy operates, as the presence of multiple exchange rates in the economy encourages arbitrage between the different markets/platforms.
Further engagements are necessary to make this a reality, whether through greater efficiency on the auction or through the interbank/bureau markets or some other appropriate mechanism.
A policy position has to be taken for the efficiency of the auction market where all foreign currency accruing to government through export surrender requirements, local forex earnings surrender requirements, taxes, duties and any other fees received in foreign currency should be put in one pot as a correct supply position for price discovery/determination at the auction.
This would improve the efficiency of the market in price determination.