Mangudya agonises on tailspin exchange rate

The Reserve Bank of Zimbabwe (RBZ) is not sitting on its laurels and is doing everything it can to deal with the fall in the local currency and heightened inflation, central bank governor Dr John Mangudya has said.

Since January, the official exchange rate has lost its value to the US dollar by a staggering 31 percent from a value of $108,6660 to the US dollar to $142,4237 per US dollar.

On the parallel market, the exchange rate has tumbled from approximately $220 per US$1 to between $280-$300 per US$1.

Dr Mangudya said the two exchange rates were linked with the parallel market rate pulling up the official exchange rate.

He said as most businesses were pricing their products using parallel market rates, it gave them the buying power at the auction where bids have been on an upward trajectory losing $4 every week for more than a month now.

“Companies are selling their stock at the prevailing rate of around 220 to 230 per dollar and that gives them the ability to bid for the US dollar at the auction at a much higher rate every week,” Dr Mangudya explained.

The central bank governor also blamed the currency fall on currency manipulators, arbitrageurs and rent seekers.

He affirmed that the economy should be free of arbitrage that is causing the growth of
the parallel market.
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“We want to avoid a rent seeking economy, we want to avoid an arbitrage economy where people think you can make money from rent seeking or arbitrage and not from proper business like production. It then means that there are agents out there distorting the market,” he said.

The central bank governor said despite the increase in foreign currency earnings in the first two months of the year, the country continues to see a rise in the parallel rate.

He blamed the increase in the parallel rate to non-economic factors that are causing indiscipline and rent seeking behaviour.

“While we appreciate, people lost their value in 2008/9, its no reason to continue on same behaviour of arbitrage and fear. People should be proud to use their own local currency,” he said.

To deal with the currency slump, Dr Mangudya said the apex bank will fight any headwinds targeted at disturbing the economy with all the instruments at its disposal.

Speaking exclusively to Business Weekly, the governor said the bank was working full time to protect the economy: “We are not going to be on our laurels”.

Commenting on why foreign currency allotments this year now averaged US$36 million per week, down from US$45 million last year, Dr Mangudya said fewer bids were now coming to the auction for various reasons including thorough know-your-customer (KYC) processes.

Due to the bank’s vigorous know-your-customer (KYC) process, which is about performing customer due diligence (CDD), bids at the auction have reduced as the process is weeding out double dipping companies, he explained.
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Dr Mangudya said the dual currency system had allowed some firms to source their own currency from their operations and as a result were no longer coming to the forex auction system.

“It is allowed to sell in foreign currency so we advocate that those who can sell in foreign currency must do so to reduce the pressure at the auction.”

The RBZ governor said the pressure at the foreign currency auction had eased because local banks were now lending in US dollars to their clients from their free funds.

This has lessened the need to come to the auction for their clients, he said.
Turning to high import prices and their impact on foreign currency demand, Dr Mangudya said though the effects were being felt locally, they did not emanate from shortage of foreign currency in the market despite auction allocations not increasing to represent global inflation.

“Not all products are affected by the reduced auction allotments, but I agree that for a similar dollar, you are now getting less from what you were getting. If you look at our numbers, the diaspora remittances have been going up in the first two months of this year and that is the foreign currency in the market which has led to no reflection of global inflation on the auction market,” the governor said.-eBusiness Weekly