Auction suppresses excess liquidity: RBZ
◆ From Page 1 regime adopted in March this year.
The fixed exchange rate regime had only been adopted to ensure certainty of pricing following the outbreak of the coronavirus pandemic, but it became uneconomic once the gap between the official and parallel market rates widened, compromising viability of businesses.
With a sub-economic official rate, holders of foreign currency responded by withholding their money from the market, consequently starving the operations of genuine business entities that required hard currency to support their activities.
But Dr Mangudya expressed confidence in an interview this week that, through the auction system, the bank had found a working formula to deal with the problem of exchange rate volatility, which had driven exponential price increases since February.
Prior to adopting the auction system, the rate had drifted from 2,5 to 1 against the US Dollar, when Zimbabwe dumped the greenback anchored multi-currency regime in February last year and reintroduced domestic currency after a 10 year hiatus, to $25 to US$ 1 by the time the interbank was scrapped over four months ago.
Depreciation of the Zimbabwe dollar and the resultant precipitous rise in inflation, amid forward pricing in anticipation of an exchange rate rise, saw inflation go on a rampage, hitting 785,6 percent by June this year, having been rebased in February 2018.
But the RBZ chief said this week that the era of exchange rate volatility and unrestrained price increases might be a thing of the past, if only the majority of market players exercise self-discipline and use the weighted average rate of the auction as the ruling rate when pricing their products.
Dr Mangudya attributed the relative exchange rate and prices stability to the use of the auction by businesses seeking foreign currency for key imports, adding that the platform had also withdrawn significant amounts of local currency that had been driving parallel market activities.
Apart from the forex auction to ensure systematic exchange rate determination, the RBZ has also tightened the screws by imposing limits on movement of cash through channels such as mobile money platforms as well as interbank transfers.
Rate volatility comes against the backdrop that Zimbabwe largely depends on imported products, after nearly two decades of economic decline decimated local production capacity across key sectors that include agriculture, while constrained average industrial capacity utilisation is projected to fall to 27 percent this year from the mid-30s.
The RBZ chief has since made an impassioned plea for all businesses to exercise self-discipline and use the ruling official exchange rate in pricing products to avoid leaving authorities with little option other than taking drastic action in order to ensure forced compliance.
“What we have seen is that there has been very positive uptake of the forex auction by the business community. We have also seen that the volatility of the exchange rate is now low and what we believe is left now is for the business community (to exercise) self-discipline in pricing their products.
“We have noticed that a number of large retail operators, that includes OK Zimbabwe and others, their pricing is now linked to the exchange rate, even the markets in Mbare suburb that are now using a cash rate of $70 to US$ 1, which is in line with the auction market (exchange) rate, but then there are some businesses that are still using an implied rate of $80 to $90 per US$ 1.
“These (exchange) rates are higher than the auction rate, although they have gone down from where they were, which was between $100 and $120 against the US dollar and any coming down of the rates means that (rate) stability is coming.
“But we want to see all business entities exercising self-discipline; because you cannot come to the auction and buy (forex) at $70 to US$ 1 and benefit from exchange gain by charging higher prices,” Dr Mangudya said.