Government, business clash over forex crisis

Chris Mahove- Acting Editor

The foreign currency crisis in the country has reached a crescendo with government now accusing business of trying to destabilize financial markets and economic stability of the country.

Emotions reached boiling point at the weekend after the Confederation of Zimbabwe Industries (CZI) issued a damning paper on the currency situation in the country in which they accused the government of attempting to create a mono-currency regime and raiding foreign currency accounts.

In the paper, titled ‘Urgent Engagement Paper on the Deteriorating Currency Situation ‘the CZI called for the immediate suspension of the forex exchange auction system until the backlog has been cleared.

“CZI believes what we are witnessing on the Zimbabwe Dollar (Z$) is tantamount to a bank run on the Reserve Bank of Zimbabwe (RBZ). The material and all the case studies on bank runs point to aggressive actions to restore trust in the institutions affected. Aggressive, transparent and visible actions are the only way to save the Z$ and stop the bank run,”

They said the country was not yet ready for a mono-currency system as it did not have international reserves, adding that the raiding of foreign currency accounts should not be raided as happened before as it had serious consequences of loss of value at all levels of business and society.

The CZI said the rules of the Dutch Auction System had been flouted resulting in the failure to settle bids and accumulating backlogs stretching over ten week periods.

“The Dutch auction was initially implemented according to the rules of the auction which rules were flouted and this is evidenced by the failure of the auction to settle bids and accumulating backlogs stretching over ten-week periods. This means the auction was auctioning money that was not there,” read the paper.

The business grouping said reports of companies having bids being prorated yet they would have submitted high-rate bids were an indication the Dutch auction rules which state that the highest bidders get all their allotments was flouted.

“The result of the above is that we lost the near convergence position that the auction had achieved in the beginning and trust was also lost especially after several promises of clearing the backlog and this is to companies that still trying to find solutions to legacy debt of yesteryear.  The failure of the auction to stay on track prevented the expansion of the supply side,”

But Reserve Bank of Zimbabwe (RBZ) Governor, John Mangudya came out guns blazing, saying the business grouping had come up with the paper without engaging it to establish the veracity of ‘rumours’ that motivated the writing of the paper.

“Consequently, the CZI has created a negative impression that has the effect of stocking market confusion and inflation. The bank is always at the disposal of stakeholders, including the CZI, for discussion and dialogue with a view to fostering interests of industry and the economy and avoid causing market instability,” he said in a statement released shortly after the issuance of the CZI paper Saturday.

Mangudya said the foreign exchange auction system would not be suspended as doing so would cause shortages of goods in the market and abet inflation.

“All foreign currency accounts are safe and the bank has no reason ‘raid’ the accounts as alleged in the CZI paper,” said.

He said the RBZ and government were committed to an orderly de-dollarization process, adding assertions that a mono currency system was now in place were false.

In their paper, the CZI had said that the auction system needed independent supervision along with the RBZ, a Chartered Accountancy firm and a registered auctioneer.

 “This serves to address the rapid trust injection required to stabilize the Z$ and allow the currency auction to perform a price discovery role for the efficient allocation of foreign currency. This implies true Dutch Auction Principals as originally envisaged are implemented. The highest bids get full allocation within the regulated limits.

“This will curb abuse of the auction by unscrupulous players in the market, as well as eliminate the premiums and discounts being applied on the official rate. It would further increase flows of foreign currency into the formal system through the participation of willing sellers,” the CZI said.

The business body said foreign currency retentions must be financed through the budget adding that banks should encourage exporters to freely set reserve prices and sell their foreign currency on the auction system.

CZI said an overvalued ZWL broadly undermined the scope for maximizing structural efficiency and the growth of both the export industry and import substitution.

“The policy of maintaining an overvalued ZWL imposes a big tax on the export industry undermining its growth and transparency.  The policy also unwittingly subsidizes imported industrial goods that then start competing unfairly for supermarket space with locally manufactured,”

They called for tight control of money supply through holding constant the stock of money circulating in the economy and implementing reserve and broad money targeting and the suspension of all quasi-fiscal activities which they said had an effect of increasing money supply growth and creating market distortions or arbitrage opportunities.

“A lasting solution to a stable exchange rate is now long overdue for a stable inflationary environment. A gradual approach is needed to achieve an effective and efficient exchange rate market, as it is not a one size fit all,” the CZI said.

In November 2020, just five months after the introduction of the auction system, former Finance Minister and current Citizens COALITION FOR Change Vice President, Tendai Biti dismissed it as hollow as there was a parallel market that was offering higher rates than those obtaining at the weekly auctions.

He said the RBZ system was hollow in that there was still a thriving parallel market that was offering rates higher than those generated weekly by the official system.

Biti noted then that the fact that the Reserve Bank of Zimbabwe was the sole supplier on the auction system meant that it was not an auction, saying an auction system was supposed to be a free market with free entry on the supply and demand sides.

“Regrettably, as far as the Dutch auction system is concerned, there is only one supply… only the Reserve Bank has been supplying foreign currency. So, where you have got one supplier, you can’t call that an auction. It’s a fixed exchange rate regime because he who controls the supply line, he who controls the tap, can control the value of the product, “he was quoted as saying then.

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