Partial implementation of monetary policy interventions may dampen outcomes, CZI

The Confederation of Zimbabwe Industries (CZI) has warned that partial implementation of policy measures remains the major risk that could undermine effectiveness of the recently announced interventions to stabilise inflation and exchange rate in the economy.

Last month, the Government announced a raft of additional measures that include the Treasury funding 25 percent export surrender requirement, an imposition of one percent tax on all foreign payments, limiting the Reserve Bank of Zimbabwe managed foreign currency auction to US$5 million per week.

The measures are aimed at stabilising inflation and exchange rate on the back of mounting inflationary pressures and exchange rate volatility.

CZI, the country’s industry lobby body, said the interventions are generally welcome in as far as inflation stabilisation is concerned, but argued the chief risk could be partial implementation of the policies.

“CZI generally welcomes the measures announced as part of inflation stabilisation strategies. However, the major risk that could emerge is partial implementation of the measures.

“This might take the form of interfering with the exchange rate, especially given that it was suppressed for a long time and stakeholders are already beginning to feel the pain associated with the liberalisation process.

“If interference emerges, this will result in continuing distortions as reflected in the widening parallel market premium, which will then undermine confidence and lead to an intensifying ‘blame game’ between the Government and the business community,” it said in its inflation and currency development update for the month of May.

Official data from the Zimbabwe National Statistics Agency (Zimstat), indicate that the month-on-month blended inflation rate increased from 2,4 percent in April 2023 to 15,7 percent in May 2023.

The spike, which represents a 13,4 percentage points, is the highest jump on month-on-month inflation since 2022.

The industrial representative group said weight of the US dollar in the blended inflation account for more than 75 percent meaning the ZWL$ accounts for a small proportion.

Thus, the increase in such a margin highlights the rampant ZWL$ inflation in the economy.

“The fact that blended month-on-month inflation, which is largely US dollar inflation plus a small component of ZWL$ inflation, is now in double digit is very worrisome, especially with respect to the affordability of basic commodities by those that earn in ZWL$ or have the ZWL$ as a significant component of their total income,” it said.

CZI said the majority of measures introduced were designed to strengthen the ailing Zimbabwe dollar that has been depreciating at an alarming rate and it was at the risk of extinction like what happened in 2008.

As a result of its weakening, the local currency has faced rejection in some quarters and unrelenting price hikes in formal shops which are required by law to accept ZWL$ and are under close surveillance. “Replacement pricing is becoming extremely difficult in local currency, and it is not astounding that some products in formal retail shops are now being sold exclusively in US dollar.

“Since January 2023 the local currency lost 110 percent of its value on the auction market and 369 percent on the parallel market.

“The massive depreciation of the local currency is being transmitted to prices which causes inflation and macroeconomic instability. It is a welcome development that the Government is still demonstrating that it can put in place measures to create the demand of ZWL$.

“In addition to these measures, it is recommended that the Government must also add at least one more tax head to be payable exclusively in ZWL$ as stability obtains, which would go a long way in further sustaining stability,” argued CZI.

The industrial lobby noted that the parallel rate spiralled out of control in May 2023 increasing from US$1: ZWL$2,000 at the end of April 2023 to US$1: ZWL$4,500 by end of May.

“Changes in prices in ZWL$ mimic changes in the parallel market rate. Pronounced changes in the parallel market rate are felt through massive price hikes.

If the exchange rate premium between the parallel market rate and the official market rate is wide, pricing in US dollar becomes not viable for formal business, as the Financial Intelligence Unit (FIU) forces businesses to use the formal exchange rate even if it is greatly overvalued.

“A wide exchange rate premium, therefore, always drives US dollar purchases to the informal sector,” it said.

Meanwhile, at the auction system the exchange rate was US$1: ZWL$6,926 while at the parallel market the rate was US$1: ZWL$8,200.-ebusinessweekly