Home Forex Exchange ‘Exchange rate convergence set to stabilise pricing’ – Chronicle

‘Exchange rate convergence set to stabilise pricing’ – Chronicle

7 min read

The Chronicle

Business Reporter
TREASURY is excited about the narrowing of the spread between the official foreign currency auction and parallel market exchange rates with the move towards convergence set to stabilise pricing and tame inflation.

The official exchange rate between the Zimbabwe dollar and US dollar moved to 1:76,76 after Tuesday’s auction that saw US$14,3 million being allotted. The weekly foreign currency auction, which was in its 6th time-running since inception on June 23, saw the local dollar easing by 6,4 percent from the previous week’s exchange rate of $72,14. Since the start of the auction system, which opened at US$1:Z$57,3 parallel market rates have remained stagnant in the past weeks averaging 90 and 100 to the US dollar.

The Reserve Bank of Zimbabwe took the bold decision to replace the fixed exchange rate with the auction system to establish the true value of the Zimbabwe dollar. Prior to the auction system, the parallel market was leading the forex exchange market driven by speculation and higher appetite for the greenback by producers and other importers. This largely fuelled foward-looking price escalation amid the widening gap between the then fixed rate and the black market rate.

“I am happy to say that it (forex auction has started off very well. But, what the auction has done is to give leadership to the foreign exchange market and we have seen some stability and even convergence,” said Finance Minister Prof Mthuli Ncube.

“That is what we desire because once we have convergence, we have stability that will deal with the pricing system and inflation, then we expect it to drop.”

Minister Ncube said Government was impressed by the growing participation from exporters, which is a good indicator of the confidence the market has in the system.

“That is what we want. It should not be just the Central Bank offloading resources on to the market but we want the market itself to offload its own resources into the market so that the market begins to take over the leadership,” he said.

According to the RBZ, the forex auction system is impacting positively on the productive sector. This is evidenced by the fact that US$32,1 million out of a total of US$71,1 million that had been traded on the platform as of last week, was channelled towards the procurement of raw materials and packaging material by the productive sector. In order to ensure availability of cash, the Apex Bank has also called on individuals and entities to bank cash money from the sale or provision of goods and services as required by the Bank Use Promotion Act [Chapter 24:24]. The requirement to bank cash extends to foreign currency received in respect of sale or provision of goods and services.

Small to medium scale businesses have however called on Government to review downwards the minimum threshold for the forex auction platform to accommodate their participation. Treasury has agreed to make consideration to that effect. The auction system accepts bids of a minimum of US$50 000 and a maximum of US$500 000 with individuals and firms required to make a single bid per week through an authorised dealer.

While pricing remains problematic, with consumers crying foul over depleting buying power, last week Minister Ncube told the Senate that given the positive impact of Governemnt monetary interventions, Treasury was expecting that year-on-year inflation will drop to about 300 percent between now and December from around 735 percent currently. He said Government’s strategy during the Covid- 19 transition period was helping citizens or the whole country to lower inflation.

Once the exchange rate convergence is achieved, it is hoped that those using US dollars would trade at the same level of inflation pricing compared to someone who is using the Zimbabwe dollars.

“That is what we are trying to catch…we expect inflation to go down and we expect the month-on-month inflation to go down by year end,” said Minister Ncube.

The stability of the monetary sector is critical to the growth of the economy and to buttress this Treasury has also pledged to maintain a tight stance on the growth in money supply.

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