The Confederation of Zimbabwe Industries (CZI) says the Zimbabwean dollar is ‘now’ in real peril, which requires urgent and well considered policy measures to be implemented by the authorities to bring back confidence into the currency markets.
The problem according to CZI is there is a ‘deep seated’ fear that the Zimbabwean dollar will continue to depreciate, which has created a strong currency preference for forex while any large payments of local currency have a potential to destabilise the foreign exchange market.
“The effect of the strong currency preference for foreign exchange has been made worse by the settlement challenges in the official foreign exchange market. The current challenges with the auction have been discussed for a long time, without any apparent movement in addressing the concerns. The lack of movement to address the issues can be explained as due to fear of market forces by the government and a suboptimal foreign currency management framework,” CZI said.
In an update to its members, CZI said “in truth” the country was now in a situation that could have been avoided had appropriate policy prescriptions been in place.
“We are of course concerned about the response by the authorities so far, which was to blame players in the foreign currency markets as the sole cause of the currency instability,” said the organisation.
“We are continuing engagement with the authorities on the situation and this is an update to CZI members on where matters are at. It must be acknowledged that we are pleased with the willingness of the authorities to engage seriously with CZI and other business member organisations in order to find a solution to the rapidly deteriorating exchange rate situation.”
CZI noted that from its quarterly surveys, the economy is “clearly” in recovery, with “many” businesses recording growth and initiating expansion projects but the economy is also experiencing “growing pains.”
“The strong rebound in economic activity is now threatened by the unfolding instability in the currency market,” said the organisation.
“This instability has been primarily driven by, the unrelenting increase in money supply, the arbitrage windows that policy seems to continue to create, increasing imports on the back of decreasing export competitiveness and bulk payments for agriculture produce and to contractors.”
The pressure on the forex market, CZI indicated, was made worse by long delays in settlement at the forex auction market.
“This instability in the currency has prompted an aggressive administrative response from the authorities that, if continued, will send the economy into a hyperinflationary tailspin destroying all the gains of the previous twelve months,” said the organisation.
In its initial engagements with the Reserve Bank of Zimbabwe, CZI offered suggestions, which the Central Bank indicated they would implement as an action plan that would result in the restoration of stability.
The key elements of the plan are to auction only available foreign exchange and settle bids within two weeks at an absolute maximum.
“Two, implement the standard rules of a Dutch auction meaning that higher bidders are allocated in full. This will allow supply and demand to play its full role at the auction and make it a true price discovery mechanism. Three, further tightening of monetary policy,” said CZI.
“ We appeal to the authorities to allow time for this plan to work and to desist from action that will reverse all the gains that we have made over the last twelve months.”
The industry coalition noted that confidence in the local currency remains low and a strong currency preference for foreign currency persists.
“The psychological scars of the hyperinflationary period still run deep within the psyche of economic agents in Zimbabwe. We see an almost religious reverence for foreign exchange with economic agents going to extraordinary lengths to procure foreign exchange in order to preserve value,” said the organisation.
CZI said the country still lacks a transparent formal foreign exchange market that responds smoothly to supply and demand for foreign exchange.
“This has resulted in an increasing parallel market premium that is becoming a growing problem.”
