Government tackles exchange rate, pricing shocks head-on

28 Jun, 2022 - 00:06 0 Views
Government tackles exchange rate, pricing shocks head-on Professor Mthuli Ncube

The Chronicle

Prosper Ndlovu and Nqobile Bhebhe, Business Reporters
GOVERNMENT has swiftly moved in to entrench the use of multiple currencies by unveiling additional measures to restore market confidence through stabilising the exchange rate while containing inflationary pressures in order to preserve the value for money and ensure that consumers retain adequate purchasing power.

Going forward, the use of multiple-currency system, which embraces both foreign currency and the Zimbabwean dollar, will be maintained for the duration of the National Development Strategy (NDS1), which spans 2021 to 2025.

Interest rates have also been increased from 80 percent to 200 percent to reflect prevailing inflation developments and curbing speculative borrowing as well as broad money supply.

In order to prevent cost-driver impact of fuel prices from breaching the US$2 per litre, the Government has completely removed the levy on diesel and at the same time significantly dropping the levy on petrol.

Maize and wheat supplies are also being enhanced to ensure adequate food availability to households with the Government fast-tracking release of stocks for the milling industry as well as liberalising imports for those with free funds.

In the past few months, the geopolitical developments in Eastern Europe where Russia is conducting a special military operation in Ukraine, have triggered price increases especially fuel across the world, including in Zimbabwe, as supply chains have been significantly affected.

To avert sharp price hikes that could have further triggered increases in commodity costs, the Government has come up with a raft of measures geared at stabilising the exchange rate and controlling inflation.

These were separately announced yesterday by Finance and Economic Development Minister, Prof Mthuli Ncube and Reserve Bank of Zimbabwe Governor, Dr John Mangudya.

RBZ Governor Dr John Mangudya

In buttressing the multi-currency system, Prof Ncube quickly clarified that this was by no means a return to yester-year dollarization, adding that the dual pricing model remains ideal.

“Government has clearly stated its intention of maintaining a multi-currency system based on dual use of the US dollar and the Zimbabwe dollar. However, the market lacks confidence that the multi-currency system is here to stay for the foreseeable future,” he said.

“To eliminate speculation and arbitrage based on this issue, the Government has decided to embed the multi-currency system and the continued use of the US dollar into law for a period of five years,” said the minister.

The inter-bank market exchange system, which run on a willing buyer willing seller basis is now mandatory by law, he said.

“The utilisation in all economic transactions of this formal rate is now made mandatory by law. While economic agents are free to price their goods in US dollars or Zimbabwe dollars, and there are no price controls, the equivalence of US dollar prices and Zimbabwe dollar prices for a commodity should be strictly based on the current interbank exchange rate as determined by the willing buyer willing seller rate,” said Prof Ncube.

He warned businesses against discounting of prices for payments made in US dollars saying the law provides for strict criminal and civil penalties including US dollar-based fines, suspension or cancellation of business for trading licences for offenders.

Professor Mthuli Ncube

“This week, the Government completely removed the levy on diesel (that is) brought it to zero cents, and significantly dropped the levy on petrol. This action prevented the price of fuel from breaching the US$2,00 per litre mark,” said the minister.

Last week, the Zimbabwe Energy Regulator Authority (Zera) announced a fuel price increase pegging diesel at $1,88 per litre from $1,76 and blended fuel is now trading at $1,77 per litre from $1,73. Zera also said the increase could have been above the current prices but the Government intervened to contain the costs.

The latest measures buttress the recent policy steps to stabilise the exchange rate as announced through the Presidential Policy Statement in May, which sought to deal with unwarranted and sustained depreciation of local currency to arrest an upward inflation spiral.

Prof Ncube said Government is convinced the recent exchange rate movements and price escalation are being driven by negative sentiments and indiscipline by economic agents as opposed to real economic fundamentals.

He said the impact of these measures have signalled to the market Government’s total commitment to enhancing the country’s foreign exchange management systems.

However, additional measures to further strengthen these systems, based on established economic facts relating to the country are required, he noted.

In view of the looming shortage of maize meal and flour in the market, which has resulted in the sharp increase of the price of bread and mealie meal to levels that ordinary citizens cannot afford, he said the Government would provide relief to millers by releasing 20 000 metric tons per month to millers for the next three months beginning in July.

This would be at the import parity price calculated at the prevailing interbank rate.

“Millers have indicated that they will in turn import 70 000mt of wheat over the same period. The wheat will be sold at an import parity price of US$680 converted into local currency equivalent at the ruling exchange rate,” said Prof Ncube.

The price of wheat to millers will be pegged $239 360. For maize, an immediate release of the 7 000mt outstanding maize allocations to millers, which had already been paid for but could not be allocated due to technical issues, would be affected.

“Over and above this, millers have indicated that they have 25 000mt of maize, which has already been paid for and are ready to make a swap arrangement with Government,” he said.

Maize

“In this regard, Government will release the equivalent quantity of maize from the Strategic Reserve in July 2022 against the impending delivery of the purchased maize.”

A further 27 000mt of maize would be released from the Strategic Grain Reserve to millers at a price of $75 000 plus the US$90 at the prevailing interbank rate.

The selling price of maize to millers will be $106 680.

However, Prof Ncube said a concerning development has been noted where millers have put the burden on the Government to replenish their grain stocks.

He said millers should be encouraged to source their own grain stocks whenever possible.

“Given the envisaged shortfall of both maize and wheat during the current season, the Government will expedite the importation of maize available in Malawi and Zambia, while wheat will be sourced from cheaper source markets,” said Prof Ncube.

Economic experts are agreed that the key drivers of exchange rate instability in any economy are fiscal deficits and the money creation by the monetary authorities.

President Mnangagwa

These variables have for a long time been brought fully under control by the New Dispensation led by President Mnangagwa, said Prof Ncube, noting that the current account outlook has moved from a deficit to surplus position.

He said trade balance has also ceased to put pressure on the exchange rate with the economy generating substantial foreign exchange, which is adequate to fund imports and other external payments.

However, the Finance minister said the confidence deficit amongst economic agents as a result of past hyperinflation experiences has resulted in rational demand for US Dollars as a store of value.

This has incentivised economic agents to engage in parallel market bench-marking of prices with a skewed preference for US Dollars for commercial transactions together with forward exchange rate pricing, which creates a vicious cycle of increasing prices, which is self-fulfilling, said the minister.

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