‘Forex for imports key to rate stability’

MONETARY authorities must fully meet the foreign currency requirements of importers as well as keep money supply growth on a tight leash in order to maintain the Zimbabwe dollar exchange rate stability, economic analysts have said.

Economist Eddie Cross, who is a member of the Reserve Bank Monetary Policy Committee (MPC), said it will be critically important to continue to meet the full requirements of importers to be able to maintain prevailing exchange rate stability.

Stability of the Zimbabwe dollar, which was liberalised in February 2019, after a decade long use of the US dollar under a multicurrency system, is one of the most important elements for keeping inflation in check.

Cross said over the last six weeks, authorities have seen a deficit of around 4 percent to what importers require from the central bank run weekly forex auction market.

“Secondly, we must keep money supply growth reasonable to prevent inflationary pressures, if we are not able to do that we create inflationary pressures that drive price increases.

“Unfortunately, there appeared to be money supply growth over the last quarter of 2020 and the reserve bank attributed this to banks lending to their customers,” he said.

Cross said money supply expanded rapidly in the last quarter of last year, effectively increasing by 117 percent on a year on year basis.

But the RBZ feels the Zimbabwe dollar exchange rate against the US dollar will continue to hold steady on the weekly auction market because Zimbabwe is earning enough forex to support critical imports.

In this regard, RBZ governor Dr John Mangudya said the exchange rate has remained stable since its introduction mid last year, helping to maintain price stability, which only saw marginal increases last December and in January this year.

Annual inflation raced to post dollarisation high of 837 percent in August last year, after Zimbabwe reintroduced and liberalised the local currency in February, after a decade long use of the US dollar anchored multicurrency regime.

Prices and indeed inflation, however, started trending down following the introduction of the auction system in June last year, which brought about sustainable formal forex trading, market led price discovery, predictability and the now prevailing stability.

Dr Mangudya attributed the 4,2 to 5,4 percent increase in prices in recent weeks to strong demand ahead of the festive season and general rise in prices globally due to Covid-19 restrictions, which have affected global trade and supply chains.

“We believe the exchange rate will continue to stabilise because the country is receiving adequate foreign currency to meet its needs, that will be the main reason for that.

“We also think that the rate will continue to hold steady if companies submit genuine bids to meet critical foreign currency needs for key imports into the country,” he said.

The auction rate was little changed at the last official trading session on Tuesday moving 0,84 percent to $83,329 against
US$1.

The US$33,7 million allotted to bidders in the main auction set a new record, while the US$2,6 million on the SME auction was marginally below the two highest totals in that auction.

As always, because priority list allotment criterion, raw materials dominated the allotments, with US$15,7 million on the main auction and US$602 842 on the SME auction.

The main auction saw US$3,9 million for machinery and equipment, US$3,4 million for fuel electricity and gas, US$3,1 million for retail imports, US$2,9 million for consumables, US$2,4 million for services, and US$1,9 million for pharmaceuticals and chemicals.

On the SMEs auction, as is now usual, consumables came in second, on US$520 178. But pharmaceuticals were well represented on US$223 507, about 8,5 percent of the total allots in this auction.

In what reflects a near common market valuation of the local currency, the bids spread has also remained largely confined within the $10 (Zimbabwe) dollars range.

The central bank chief has always been a strong proponent of the need to boost local production of a key or basic commodities and exportable products to reduce the pressure on demand for the elusive hard currency while ramping up the inflows.-chronicle.co.zw