CZI tables exchange rate proposal

THE Confederation of Zimbabwe Industries (CZI) has proposed the use of an exchange rate of not more than 20 percent below the official rate to minimise exchange losses.

Currently, businesses apply an exchange rate of the auction rate plus a 10 percent margin when trading.

This has seen a massive loss of US dollar sales in the formal sector every time there is a wide parallel market premium.

The average black market rate is $12 000 per US dollar against the official rate of $5 903.

“This is a major driver of informalisation,” said CZI in its recent policy recommendation proposal to the Government.

“The CZI has the data to quantify these losses. Business proposes that formal businesses be allowed to use an exchange rate that is not more than 20 percent below the market rates to continue trading in US dollars and to ensure that US dollar revenue does not shift to the informal sector.

Despite the recommendation to remove the 10 percent limit of the exchange rate used by formal retailers by the Reserve Bank of Zimbabwe last year, prices of their goods and services have largely remained uncompetitive due to a wide gap between the official and parallel market exchange rates.

This is because the scrapping of a 10 percent limit on the exchange rate used by formal retailers, as recommended by the central bank’s Monetary Policy Committee (MPC) can only be effective upon the promulgation of necessary legal instruments to formalize it.

Once the scrapping of the limit is legally effected, formal retailers will be able to set more competitive prices, according to Morgan & Co., a local diversified financial services group.

Pickn Pay and OK Zimbabwe are major formal retailers, commanding nearly 40 percent of the market.

For the better part of the year, the official rate has been significantly lower than the parallel market, creating between 30 and 50 percent disparity. However, the gap has since widened, now averaging 80-100 percent.

This has made it difficult for formal retailers to compete with informal traders who are able to offer lower prices due to their access to the parallel market exchange rate, the firm said.

“Formal retailers are currently required to use the official rate for US dollar customers which offers less value per dollar compared to informal retailers,”said Morgan & Co.

“Although authorities tweaked this and allowed formal players to add a 10 percent premium to the official rate, formal retailers’ prices remained uncompetitive.

“We note that authorities have since scrapped the requirement, but it remains ineffective until a legal directive is issued and we identify this a key value trigger for the business.”

Government pronouncements need to be regularised through statutory instruments to give them legal effect.

Morgan & Co. also noted the trend of manufacturers flavouring near-cash informal retailers paying in foreign currency upfront has further eroded formal retailers’ bargaining power as mass market retailers.

This shift is driven by the preference of manufacturers to operate in hard currency.

The formal retail market was severely impacted by Covid-19 between 2019 and 2020, with reduced operating hours implemented to curb the spread of the virus.

While the sector has shown signs of recovery, its progress has been hindered by the influx of new entrants that capitalised on the market void created during the pandemic.

Morgan& Co estimate that Zimbabwe’s formal FCMG market is US$1,8 billion and gross domestic price per capita growth plays an influential role in the growth of the industry.

“We identify the informal market as a threat to the formal sector because it is price competitive. The sector is untaxed and avoids the Intermediary Transfer Tax (IMMT) that has weighed in formal retailers’ already thin margins.

“Further, the informal sector offers better value for customers with US dollars compared to the formal retailers because they use parallel market rates, unlike formal retailers who cannot offer more than 10 percent from the official rate,” according to Morgan & Co.

The bargaining power of formal retailers, which stems from their ability to provide a mass market platform, has been under increasing pressure due to declining US dollar sales, stricter supplier terms, and the expansion of the informal market.

The volatile local currency has incentivised suppliers to demand upfront cash payments, preferably in foreign currency, exacerbating pricing inefficiencies among formal retailers and further restricting US dollar sales.

Consequently, FMCG manufacturers and suppliers have shifted their focus towards the near-cash informal sector, diminishing the bargaining power of formal retailers, said Morgan & Co.-herald