Businesses struggle to get forex for inputs

Businesses are struggling to obtain foreign currency from banks to fund procurement of inputs they require for production, a scenario analysts fear creates fertile grounds for total rejection of the country’s new currency, the Zimbabwe Gold (ZiG).

Zimbabwe was forced to abandon its domestic currency, for the first time, in 2009 as the market rejected it after it had been massively eroded by hyperinflation.

The domestic unit of account was reintroduced in February 2019, but since then it has been dogged by volatility and high inflation, damaging its allure among economic agents.

Authorities have been on a spirited drive to promote the acceptance of ZiG across the economy since its launch on April 5, 2024, to replace the inflation-weary Zimbabwe dollar.

Like its predecessor, ZiG has struggled to find willing takers with most market players preferring to deal in foreign currency, mostly US dollars.

The premium between the official and parallel market exchange rate has also remained elevated. Several issues are reportedly militating against the new currency, including challenges regarding its convertibility and limitations around essential products it can or cannot buy.

Presently, ZiG cannot be used to buy fuel, an imported commodity that requires foreign currency to purchase, forcing traders to charge for the precious commodity exclusively in hard currency.

Tight US dollar liquidity on the formal market, where banks cannot meet the industry’s requirements for foreign currency, has also resulted in the producers demanding exclusive payment in US dollars.

Zimbabwe imports the bulk of raw materials used in production processes after the collapse of local production capacity during the nearly two decades of economic meltdown to about 2008.

In 2023, the import bill topped US$9,2 billion with top imports, according to Zimstat, being fuel, raw materials and cereals. While the Reserve Bank of Zimbabwe (RBZ) and the Ministry of Finance, Economic Development and Investment Promotion have repeatedly insisted that all genuine external payment invoices can be funded by banks, most financial institutions have told importers they have no hard currency to match their appetite.

In its policy response paper following the presentation of the 2024 monetary policy statement on April 5, 2024 the Confederation of Zimbabwe Industries (CZI) highlighted some of the opportunities to address issues around the local currency. CZI said MPS represented a significant policy shift from fiat currency to a reserve-backed currency if there was a strong demonstration of backup commitment.

The industrial lobby pointed out that the market had not yet fully appreciated the policy shift as demonstrated by the open market exchange rate premiums.

The lobby group highlighted some of the opportunities that could arise out of the policy shift announced in the MPS.

CZI indicated the need for authorities, over the next three months, to focus on ensuring the convertibility of ZiG for all legitimate transactions and use transactional demand for the currency to start building up reserves for backing the new currency.

Currency convertibility can be defined as the ability to exchange one currency for another at a given conversion rate and in terms of the usability of a currency for foreign transactions.

“Ensuring that ZiG is convertible for all legitimate current account transactions has already been highlighted by the RBZ as a priority. Successfully implementing this will lead to rapid build-up of ZiG’s credibility,” CZI said.

There is significant transactional demand for cash in the economy. The demand for cash presents a massive opportunity for the RBZ to raise reserves to back the ZiG and increase confidence in ZiG.

As of the monetary policy statement of April 5, 2024, the total amount of ZiG was approximately 1 billion.

“Let us assume a modest cash withdrawal limit of ZiG 1000 per person per week and assume two hundred and fifty thousand people withdraw this weekly limit.”

This means the entire stock of electronic ZiG will be exchanged for cash within four weeks. The reduction of the electronic stock of ZiG will create an acute shortage of electronic ZiG, which should lead to the strengthening of ZiG in the foreign exchange market.

“The strengthening of ZiG on the foreign exchange market gives the RBZ an opportunity to start accumulating reserves in exchange for ZiG, replacing ZiG that has been exchanged for cash and further building confidence in ZiG,” CZI said.

Weighing in on the matter, Confederation of Zimbabwe Retailers president Denford Mutashu this week said that during a meeting to share notes with manufacturers recently, the producers revealed the challenges they are facing to get from the banks the forex they need to procure inputs.

“The manufacturers, also, if you listen to their plight, it is realistic. Some manufacturers indicated that they are sitting on more than ZiG130 million, which they do not know what to do with because suppliers of raw materials are also demanding USD.

“Someone indicated to me this afternoon that they also communicated with their bankers wishing to purchase foreign currency to import raw materials, but there have not been any favourable responses from the banks.

“So I think that this whole matter (ZiG acceptance) rests with the Reserve Bank and the financial services sector. There has gotta be a way to capacitate banks, lubricate banks, oil banks so that they have got sufficient foreign currency for supporting productive sectors,” he said.

Mutashu said the absence of measures to capacitate banks to support key productive sectors continued to create challenges in promoting the acceptance and wider use of the new currency, as well as guaranteeing its stability.

Operators in the small retail and wholesale segment insist on exclusive payment in forex arguing manufacturers and suppliers also demand payment in hard currency given the limited supply on the interbank market.

Finance and Economic Development Minister Mthuli Ncube said this week that all economic agents must use the official exchange rate when pricing their goods, despite the fact some of the businesses have to get forex at a higher cost on the open market due to shortages on the formal market.

“In order to stabilise the value of the ZiG, Government has introduced a liberalised foreign exchange market, where the exchange rate is freely determined by the local currency money supply in circulation.

“The availability of such reserves will ensure that all bonafide and legitimate requests for foreign currency through the banking system will be fully satisfied,” he said.

The minister also stressed that since the exchange rate was market-determined, there was no basis for any economic agents to use any other rate “other than the prevailing average interbank foreign currency selling exchange rate”.

Contrary to this assertion, industry sources said while the authorities have always claimed that those in need of forex could get it from the interbank market, the reality on the ground suggested otherwise.

“Banks have told businesses in no uncertain terms that they have no forex. There are more buyers than sellers on the willing buyer-will-seller market,” said a source who requested anonymity.

Banking sector sources further indicated the market has largely been dependent on export surrenders, with most exporters holding on to their foreign currency, which explains the prevailing tight US dollar liquidity situation.

The RBZ has since, reportedly, started selling foreign currency to importers who submitted requests to banks following the directive by the central bank for authorised dealers to submit a pipeline of importers’ forex requirements until June.

Bankers Association of Zimbabwe president Lawrence Nyazema said “RBZ has started selling reasonable amounts to banks against submitted pipelines, (but) customers with ZiG loans are disqualified, according to the rules,” he said.He however noted that there have been some improvements in the supply of forex over the last couple of weeks.

Farai Mutambanengwe, an economist and Small and Medium Enterprises Association of Zimbabwe chief executive said there was a lot of confusion around ZiG, which could lay the foundation for its total rejection by the market.

“I think there is a lot of confusion in the market. When it was initially pronounced, we were told it (ZiG) was backed, (including with US dollars), but now it turns out that you cannot get US dollars at the bank even if you have ZiG.

“Also, those people who were in the foreign exchange queue, for their ZWL have been converted into Treasury Bills. When you then force people to accept ZiG it will not work. Some players are now stuck with the ZiG,” he said, adding such economic agents “cannot use it anywhere else”.

Informal sector players, who now deal exclusively in foreign currency cash, had their hands “burnt”, after being made to exchange their Zimbabwe dollar, following the currency relaunch, at the last official rate of about $33 000/US$1 when the cash rate in the market had been about $6 000/US$1.

“People will not accept ZiG because they do not understand what it is worth,” adding, that certain segments were rating ZiG10 cash to be the equivalent of US$0,50, creating disparities with the official rate, which further dents confidence in the market.-ebusinessweekly