Hubris: The RBZ`s mistaken and blatant disregard of the CZI currency paper
Make no mistake, business should take positions on issues core to their operations, and have a responsibility to advocate for the right policies, and must also fiercely fight those that hurt them.
On April 22, a strongly worded 1,500-word CZI paper on the “deteriorating currency situation” was made public, and caused a stir. The paper laid out Zimbabwe`s existential currency problems in detail, and warned that the “local currency was at the brink of rejection.” Among other things, CZI proposed that the RBZ`s foreign currency auction be suspended until the 10-week backlog is cleared. To be fair, most of what was contained in this CZI paper was a very accurate depiction of where the economy is. Nothing new!
On the inflation front, Zimbabwe is witnessing a strong bout of imported inflation, and the rising fuel prices are a testament to this. US dollar inflation is gaining momentum globally, oil prices are at historic highs, while freight rates are up around 200%, affecting supply chains. This inflation wave is also affecting the food sector, with rising wheat, maize and fertiliser prices expected to greatly affect the upcoming farming season.
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Essentially, more foreign currency will be needed this year, not only to grow the same amount of crops as last season, but for imports too. In its recent quarterly trading update, Innscor warned that maize and soya imports will be necessary in the months ahead to avert disaster. So when the CZI cautioned in its paper that, “getting the price of foreign currency right is a fundamental matter of Zimbabwe’s economic development interest,” it was not exaggerating.
Fixing of rates and surrender requirements hurting exporters
And yet, the export sector – which generates this much needed foreign currency – is in a state of flux, affected by the RBZ`s policy to ‘fix’ the auction rate at around ZWL160 to the dollar. This at a time when exporters are procuring input requirements from suppliers who are pricing at the parallel rate, or exclusively in US dollars. With the parallel rate now around twice the auction rate, it is getting incredibly difficult for exporting companies to get by.
Suppliers are increasingly demanding the foreign currency that the RBZ is laying claim to as retentions, and not the ZWL that the same RBZ is giving exporters at less than half its real value. Exporters have no choice but to find ways and means to avoid surrendering the foreign currency to the RBZ for a song. The alternative is as startling as it is stark. Either operating under care and maintenance at best, or outright closure of operations. Inevitably, as has been happening, the supply of US dollars flowing to the auction market from the country`s exporters has proved insufficient, leading to the 10-12 week delays at the auction market.
This because as the CZI rightly observed, the auction market is allocating US dollars that are simply not there. Now, this gap will obviously have to be filled from other sources, and in times past, loans from Afreximbank have proved to be the go-to backstop solution for the authorities. This unfortunately is neither sustainable, nor right, as these loans are collateralised against future export receipts.
Getting the foreign currency price right
A more sustainable solution would be to float the currency and allow the market, not the suits at Number 80 Samora Machel Avenue, to determine the exchange rate and for the RBZ to abolish the surrender requirements on export proceeds. And the best time to have done this was immediately when the country received SDR`s worth US$1 billion from the IMF.
A freely determined exchange rate at a time of rising commodity prices like now would encourage higher exports and provide significant flows of foreign exchange. Instead and at the moment, exporters have little incentive to invest in new, let alone existing production, when surrender requirements on export proceeds remain so high in order to ‘assist’ the funding of the auction system. This policy clearly isn’t working!
Infrastructure and agricultural spending driving parallel market rates?
On the other hand, Government has been touting its massive infrastructure drive, with a focus on road rehabilitation and dams. Its contractors are being paid in ZWL, and one would also assume, being given priority at the auction to fund their foreign currency inputs. If on the other hand, the required US dollar numbers are simply too great for plant and equipment, then these contractors, whether local or foreign, may have no choice but to look elsewhere for foreign exchange and index their ZWL quotes to US dollars.
The same could also be said about the forthcoming agricultural season where the RBZ will be printing ZWL to fund the suppliers of fertilizers and chemicals for farmers. These same suppliers will then be looking to convert that ZWL so that they can import the products. Ironically therefore, it might be that it is Government’s infrastructure drive together with the financial support that it is giving the farming sector that is adding to the current pressure on the parallel rate.
Business must continue voicing concerns
These are the very real and present threats that the economy is facing. Yet in a terse rebuttal, The RBZ all but dismissed the CZI submissions. To what end? Who are they fooling? If the current approach is maintained, the results will be clear. A continued gravitation by the market toward US dollar trade, with most corporates channeling products to the informal sector which is predominantly US dollar cash based. Depreciation of the ZWL which has very little propping it up, will only accelerate, rendering it worthless and undesirable.
The important bit in this story however, is that the CZI put out a coherent, and logical position to the authorities, showing how dire the situation is. This is the right thing to do, and more of this needs to happen in Zimbabwe. Open and transparent conversations without sugar-coats! Because left to their own devices, there really is no telling what detrimental course of action the authorities will pursue. Make no mistake, business should take policy positions on issues core to their operations, and have a responsibility to advocate for the right policies, and must also fiercely fight those that hurt them.
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