Industry buckles under weight of wider exchange rate disparity

The sustained widening of the Zimbabwe dollar exchange rate is once again weighing heavily on compliant formal businesses by discouraging US dollar sales through pricing disparities, the country’s largest industrial lobby group, Confederation of Zimbabwe Industries (CZI) said.

The lobby group argued the continuous depreciation of the domestic unit has reversed all inflation gains achieved last year.

The industrial lobby said Zimbabwe’s geometrically blended annual inflation was on a consistent declining trend in 2023, having shed more than 35 percentage points between January and October.

“However, since November 2023, the country began to experience inflationary pressures, a trend which has spilled into 2024. All the gains that had been made in the early second half of 2023 are continuously being reversed by the surging annual inflation,” CZI said.

The blended annual inflation rate for January 2024 increased to 34,8 percent, gaining 8,3 percentage points from 26,5 percent in December 2023.

“This means that the inflationary gains since March 2023 have already been eroded, underlining that a lot still needs to be done on the policy side to keep the annual inflation under control away from changing the measurement methods,” CZI noted.

There are several reasons for the inflationary pressures, the manufacturing lobby group said, including the increasing Zimbabwe dollar inflation, despite its weight of only 20 percent in the overall blended inflation basket.

This, generally, mirrors the depreciation of the exchange rate on the parallel market.

The rising parallel market premium forces compliant wholesalers and retailers to increase their USD prices to avoid prosecution from the Financial Intelligence Unit (FIU), an investigative arm of the central bank.

CZI also attributed the inflationary pressures in the economy to some of the measures announced in the 2024 National Budget, which had the general impact of increasing the US dollar prices, which account for 80 percent of the blended inflation basket weighting.

Finance and Economic Development Minister, Professor Mthuli Ncube, proposed in his 2024 National Budget statement several revenue measures, among them the tax on sugar content in beverages and an increase in toll fees.

It was against this background that said government measures in 2024 should be aimed at achieving convergence through reigning the parallel market as playing catch up with the parallel market is difficult.

Zimbabwe’s central bank is yet to deliver the 2024 monetary policy statement amid shrill calls for measures to curtail the freefall of the local currency, which is driving resurgent inflation and causing pricing headaches for businesses.

CZI said in its currency and inflation developments update for January 2024, the widening of the exchange rate premium was also facilitating further informalisation in the Zimbabwean economy.

To illustrate the impact on growing informalisation CZI said the 2024 National Budget statement noted that although US dollars now accounted for 78 percent of all transactions in the economy, actual forex revenue collections were only 48 percent of the total tax inflows.

This implies that most of the transactions are being done through the informal sector and, hence, are not taxed.

CZI noted though that there had been a decrease in the exchange rate premium from 74 percent in December 2023 to 65 percent in January 2024. However, the January 2024 exchange rate premium is still higher than that of January 2023, which was 44 percent.

The exchange rate disparity implies that firms that comply with the requirement for prices to be based on the ruling formal exchange rate plus 10 percent are once again experiencing huge disadvantages in terms of US dollar pricing.

“Although the official exchange rate has been depreciating significantly in January, the rate of depreciation on the parallel market has been higher, hence convergence is yet to happen,” CZI said.

Hinting at excessive money supply, the major problem cited for currency stability in the past, as the major cause of currency depreciation, CZI said the control of money supply remained critical in reigning in the parallel market exchange rate.

It stressed that liquidity injection was the most significant driver of depreciation, suggesting the Government delayed paying contractors and service providers last year, only to release the payment as a lump sum towards the end of the year.

The instability in the domestic currency exchange rate then arises from the actions of economic agents trying to preserve value by changing into US dollars.-ebusinessweekly