‘Speculative business models retrogressive’
ARBITRAGE business models, where firms seek to make profits through exploiting loopholes in the market, are retrogressive to economic development and undermine confidence in the market, Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya has said.
Last month, President Mnangagwa announced a cocktail of measures to bring sanity to the market amid exchange rate volatility and rising prices of basic commodities.
There are signs recent measures are beginning to bear fruit.
At Tuesday’s foreign currency auction, the average exchange rate at US$1:$308,5 rose above the interbank rate of US$1:$301,4.
The premium between the parallel market rate and the official exchange rate, which was over 150 percent before the new measures, is now much lower at approximately 60 percent.
This is significant progress towards convergence. Market watchers say the narrowing margin between the parallel market and official exchange rate suggests arbitrage bidders are slowly leaving the market.
Addressing delegates at the Chamber of Mines of Zimbabwe (CoMZ) annual conference in Victoria Falls on Friday, Dr Mangudya said local foreign currency liquidity in the economy at over US$2,4 billion was enough to stabilise the Zimbabwe dollar and support production.
He, however, said arbitrage business models are not good for the economy, as they are selfish, unsustainable and inflationary.
“Domestic foreign currency liquidity in the economy at current levels of over US$2,4 billion is sufficient to stabilise the domestic currency and support production,” he said.
“Confidence-building measures being taken by the Government will address negative sentiment affecting economic dynamics.
“We believe economic fundamentals are sound enough to support the exchange rate and price stability.”
The prevailing multicurrency system was the most ideal for payments and transacting, he said.
RBZ maintains the country is generating adequate foreign currency, as receipts topped a record US$9,7 billion last year compared to foreign payments of US$7 billion.
“The country has so far received foreign currency amounting to US$4,1 billion as at May 15, 2022, representing a 40,5 percent increase from US$2,8 billion the same period last year. Money supply has been under check, with reserve money stable at around $27 billion since October 2021,” he said.
Last month, Government temporarily suspended lending by banks to put a lid on inflation and facilitate investigations into malfeasance in the financial services sector.
“Exchange rate is, therefore, not as a result of shortages of foreign currency and money supply growth.
“Instead, confidence deficit, appetite for US dollar for store of value, speculative behaviours and general market indiscipline are the major drivers which the Government and the bank are currently addressing.”
These interventions, Dr Mangudya added, should be allowed to take effect.
Currency and price instability, including imported inflation, have been pushing up inflation. Annual inflation rose to 131,7 percent in May from 96,4 percent a month earlier.
Economist Professor Ashok Chakravat said the Government had done all it could to put the economy on a sound footing and even the International Monetary Fund had commended efforts made so far.