The Reserve Bank of Zimbabwe (RBZ) and the Treasury have gone to town on the stability achieved on the local currency against the greenback, but the economic problems facing Zimbabweans tell a different story.
While the official auction rate closed last week below ZW$120 against the dollar, parallel market rates on the other hand soared, breaking through the ZW$250 mark last week.
It was a function of demand on the auction system that continued to trump supply.
This is an apparent testament to the failure of the forex auction system which has hedged 30% of the country’s formal foreign currency transactions, representing a small portion in the global mix.
The price of products on the shelves indicates an adoption of parallel market rates since there is no justification for the increase in prices in US dollars, based on the official auction rate, since 2019.
The Zimbabwean dollar suffered a crisis of confidence after the RBZ snuck into bonds which, until 2019 when the Zimbabwean dollar was officially introduced, traded at par with the US dollar.
From around ZW$190, before the Christmas holidays, to over ZW$250, the local dollar has been on a slippery slope and pricing for businesses is a daunting task.
While the RBZ has warned against fraudulent foreign exchange practices, especially for companies that benefit from the auction system, there have been huge delays in the allocation of approved bids of up to 13 weeks in the past, only part of the offers being approved, creating another financing. deficit.
As a result, manufacturers, retailers and wholesalers have favored the US dollar, chasing the parallel market rate to hedge against exchange rate risk as well as bolster their ability to restock, restock and remain viable. .
A snapshot survey by this publication on Wednesday this week shows manufacturers pricing their products at a rate of around ZWL$200 to US$1.
The country’s two major retailers, OK Zimbabwe and TM/PicknPay, are trading the US dollar at 178.
Economist Chenaiyimoyo Mutambasere said companies are using parallel market rates when pricing due to a severe shortage of currency at auctions.
She said companies continued to add a premium to parallel market rates due to the high level of volatility.
“It makes no sense that these locally produced products, even imports have increased by more than 100% in the last two years.
“It just doesn’t make sense and the obvious reason behind price hikes in local currency is that companies are chasing parallel market rates, either to be able to stockpile or to encourage sales in US dollars,” Mutambasere said. , adding that the exchange rate risk had become a huge problem.
“With currency risk in an environment like ours, a company charges a premium to hedge against shocks and that’s exactly what happened.
The obvious solution is, and I’ve said it before, to dollarize,” she added.
Markets analyst Batanai Matsika said companies set their prices using parallel market rates because that’s where most of their costs are.
“The auction remains insignificant in terms of Zimbabwe’s global foreign exchange supply figure and you can see that by looking at imports versus what the auction is profiting from.
“This means that the majority of costs such as labor and transportation, among others, are compared to parallel market rates for the bulk of businesses,” Matsika said.
Chartered Accountant Trust Chikohora further noted that prices in the market are centered on the parallel market exchange rate due to a shortage of foreign currencies on the auction floor.
“For some companies it’s because they don’t have access to foreign currency in auctions, but that’s not justified for those who get foreign currency in auctions.
“In this case it is not warranted because they can replace inventory at these rates and that means they would have to price using the auction rate.
That’s why I’ve always talked about why it’s important to follow up to make sure the auction advantage is reflected in their price,” Chikohora said.
“It is important that the auction system is efficient so that authentic companies that want to obtain foreign currency can do so in time to avoid accessing parallel market funds,” Chikohora added.
Last week, RBZ Governor John Mangudya in his Monetary Policy Statement (MPS) said the auction platform had since its inception utilized 30% of the country’s formal foreign currency transactions, leaving a huge void and forcing businesses and individuals to resort to the parallel market where rates have since skyrocketed.
Mangudya said the parallel market exchange rate premium widened in the last quarter of 2021 to between 40% and 90% due to strong demand for foreign currency driven by an increase in aggregate demand from foreign exchange. good agricultural development and a general increase in economic activity and exports.
Hundreds of millions have so far been borrowed to support the auction, but the results have been less than ideal.
Mangudya said the ultimate solution to the country’s foreign exchange situation is not borrowing but increasing production, improving productivity and effectively mobilizing domestic financial resources.
The currency auction system is now in its second year after its inception on June 23, 2020.