Is forex parallel market rate a fallacy?

“The foreign exchange market is adequately oiled to cater to bona fide foreign currency invoices through the foreign currency balances in individual and firms’ foreign currency bank accounts and the regular liquefication of the interbank market by the Reserve Bank from 50 percent of the 25 percent foreign currency surrender proceeds,” Dr Mushayavanhu added.
Tapiwanashe Mangwiro

The country has been seeing an increase in the parallel market rates over the past three weeks despite efforts to cool the market by the Reserve Bank of Zimbabwe with an injection of US$50 million in the market. Analysts say the market is not efficient and reflects the true position of our foreign currency market.

Suppliers have been restricted from going to the official market when the need for foreign currency arises due to the law that says no entity will go to the auction if it has money in its nostro account. The RBZ is saying the money is there but expunge your nostro balances before coming to the foreign market.

To the contrary, firms are arguing that the right to save in a currency one prefers is no longer an option and they also cannot pay two suppliers of their own at one go as they need to empty accounts first before settling a second transaction.

Is the parallel rate a fallacy?

Analyst, Tafara Mtutu, said the USD supply is there, but it is not, rising as fast as ZiG supply, especially in the last few weeks and resultantly, you have more ZiG chasing USD.

“That’s where you start to see the disparity, especially from official and black-market rates, because when you have ZiG, and you get nothing from the official market, the formal markets, you end up going to the black market,” he said.

Economist, Enoch Rukarwa, believes the movement in the parallel market rate is not a fundamentally driven depreciation but more of implied depreciation.

“Local exchange rate developments are a function of more behavioural factors as opposed to real fundamentals. However, there is a lot that needs to be done around terms of trade, central bank intervention, Government actions and general economic factors to ensure exchange rate stability,” Rukarwa said.

The RBZ says the observed increase in the parallel market premium is at variance to the current macroeconomic fundamentals, which have remained robust to support the general economic activities, including the foreign exchange market.

The Governor argued:

“The observed increase in the foreign currency premium merely reflects forward pricing behaviour by some companies.

“ Precisely, the higher parallel market rates are implied in the pricing structures of goods and services as opposed to the actual trading of foreign currency in the alternative market where the rates and trades have remained low since the introduction of the structured currency.”

Local USD needs pushing parallel market?

The exchange rate for some is not being pushed by money printing but demand for local obligations, which can be argued to be from lack of access of funds from the interbank market.

“The current exchange rate dynamics are more about the demand for local obligations than about money printing.

“Companies receiving a majority of their revenue in ZiG are struggling to meet their suppliers’ demands for USD, pushing them towards the parallel market due to the liquidity issues in the official foreign currency channels,” commented analyst Michael Hungwe.

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A local company, which is getting about 80 percent ZiG in revenue but its suppliers want USDs only because they cite that the foreign currency market is not liquid enough for them will be forced to look for the foreign currency on the parallel market.

However, the Governor said the banks are not allowed to sell foreign currency for domestic use as it leads to another full dollarisation.

“We cannot allow forex purchases for domestic transactions on the interbank market. Otherwise, we will end up with 100 percent dollarisation. It is like allowing people to walk into a bank and swap their ZiG for USD as a way of storing value,” Dr Mushayavanhu said.

With the current position of the RBZ, analysts say the bank then needs to avail funds for importers as and when they are needed for them not to pressure their customers to use one currency over the other.

Is there a foreign currency backlog?

Rukarwa suggests that the foreign currency market is not a free market as there is excess demand which is not being expunged due to different laws and conditions leading to the artificial exchange rate.

“With an efficient exchange rate, the market should clear whereby there is no excess supply or demand, however, at the prevailing interbank exchange rate there is excess supply of local currency.

“The biggest challenge that we have in the local economy is that, Government is the biggest player yet it cannot control other key input factors like foreign exchange, especially given obtaining current account imbalances and confidence deficit,” he added.

As noted, the RBZ has also been strategically intervening to smoothen and clear the market in cases where there are genuine supply and demand mismatches of foreign currency from the regular sources supporting the interbank foreign exchange market.

“The foreign exchange market is adequately oiled to cater to bona fide foreign currency invoices through the foreign currency balances in individual and firms’ foreign currency bank accounts and the regular liquefication of the interbank market by the Reserve Bank from 50 percent of the 25 percent foreign currency surrender proceeds,” Dr Mushayavanhu added.

“Despite the obtaining multicurrency system, the Reserve Bank of Zimbabwe has noted that some economic agents have a penchant for offloading ZiG to look for US$ for speculative purposes through upfront stocking of raw materials and other consumables even though they have foreign currency in their bank accounts.

“This has resulted in the build-up of artificial pipeline foreign currency demand.”

Conclusively, there is a mismatch between what the Government is saying and what the economy is saying, and there is a need for consistency from that perspective, from the perspective of monetary policy and also even support from the fiscal policy.

“When there is that mismatch, people begin to make their own conclusions and then the citizens lose confidence in whatever the Government is saying,” the analysts
said.-ebsinessweekl