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Pegged exchange rate unsustainable – Bulawayo24 News

Zimbabwe’s export receipts for the first 9 months of 2021 jumped 38% to US$6.10 billion from US$4.43 billion realized in the same period in 2020. Notable improvements have been realized in international remittances which grew by over 53% and export earnings which grew by 36% buoyed by firming commodity prices.  The growth is expected to take Zimbabwe’s official foreign currency earnings to a record figure of about US$8 billion in 2021 (Up from 2020 value of US$6.29 billion). Despite the year on year growth in export earnings, the country is stuck in unrelenting artificial foreign currency shortages. The shortages have created an undesirable system where buying and selling foreign currency has become a big business with a greater yield than most formal businesses. Similarly, the shortages create unhealthy arbitrage opportunities in the market thereby causing price instability. A significant portion of the earned foreign currency is being diverted to the informal market and leaking from the economy through Illicit Financial Flows (IFFs) due to the current foreign exchange market inefficiencies.

Illicit Financial Flows (IFFs)

It is estimated that Zimbabwe loses over US$1.5 billion every year through IFFs that could potentially benefit the country in terms tax revenues and downstream payments in various value chains. The flows manifest through minerals smuggling, foreign currency externalization and tax evasion by local and foreign businesses. Exacerbating this endemic problem is the pegged exchange rate where exporters and traders realize losses if they convert their earnings to local currency through the pegged auction rate. The rate also acts as a tax on foreign currency deposits in the local financial sector.
There is a positive relationship between poor economic governance and illicit financial outflows with export of illicit funds often requiring the use of illegal means that involve systematic corruption.

FCA Balances and lending
US Dollar deposits in Foreign Currency Accounts (FCA) have grown from US$352 million in January 2020 to over US$2.4 billion as of October 2021. The depositors have no incentive to convert these funds using a rate which is lower than the market accepted rate. The funds also remain idle because banks require guarantees (backed by law) that borrowers of foreign currency repay it in hard currency to avoid a repeat of 2009 and 2019 when borrowers repaid foreign currency denominated debts using a depreciated local currency. This would not be the case if the foreign exchange market was market determined through a managed floating mechanism. Therefore, the absence of a market determined foreign exchange market and monetary policy inconsistency is negatively impacting the local credit market. Various sectors of the economy would benefit from the idle funds to ramp up production, retool and meet domestic demand.

Increasing external debt
As a result of the disparity between the pegged formal rate and the free market rate, the central bank and treasury are the biggest, and only suppliers of foreign currency on the auction platform. The central bank has gone to the length of acquiring collaterized lines of credit (external debt) from AfreximBank and other financiers to support the auction allocation mechanism. This would not be necessary if the exchange rate was market determined as it would crowd in private funds from exporters, local businesses, Non-Governmental Organizations (NGOs) and households who benefit from over US$1.3 billion in diaspora remittances. The central bank is also committing millions in foreign currency to dividends repatriation for foreign owned companies and multinational corporations (MNCs) operating in Zimbabwe. This role would be easily performed by commercial banks if the auction system was market determined. Additionally, government would be able to utilize a significant portion of more than a billion in foreign currency tax revenues it earns on paying living wages for its restive civil service to restore normal public service delivery especially in schools and health care. With foreign debt now over US$10.7 billion (excluding central bank debts) before the Global Compensation Deed debt of US$3.5 billion to former commercial farmers is factored in, it is not sustainable for the central bank to incur more external debt to support auction system or subsidize various importers at the expense of exporters and the economy at large.

Pegged rate and Inflation
The central bank has revised its year-end inflation target upwards for the third time to 53%, from the previous forecast of 10% at the beginning of the year and 25%-35% forecast of August 2021. The main source of inflationary pressure on the local market is money supply growth which leads to artificial demand for foreign currency on both the formal and parallel markets. The central bank requires foreign currency to service external debt obligations (among other purposes), hence it is caught in a never ending printing spiral. The central bank has limited interest in letting the auction rate be market driven as that will entail paying more for the 40% in retained export earnings by the bank. Going forward, money supply growth is expected to maintain annual inflation in double digit figures.

Pegged rate and agriculture
Local farmers have started demanding payment for delivered produce in foreign currency due to the serious depreciation of the Zimbabwean Dollar. The government had set high producer prices for the 2020/21 agriculture marketing season to improve productivity and fend off side marketing of grain. However, the spread between the auction rate and parallel rates provides a disincentive to farmers who are rarely paid on the spot. This means agriculture productivity is dependent on an efficient exchange rate that ensures viability for farmers.

Pegged rate and competitiveness

The huge spread between the free market rate and the auction rate means that the government now has import subsidies for various importers and the central bank is also subsidizing citizens to access cheap foreign currency for domestic consumption. This framework is creating an unequal operating environment across various sectors of the economy with exporters (especially miners and tobacco farmers) feeling robbed. For every US$1 of export proceeds, exporters now lose at least 20 cents on surrendering 40% to the central bank under the current export control regulations. This is before various taxes, levies and license fees charged in foreign currency apply to the exporters. This means the pegged exchange rate is acting as a tax on all exports. The exchange control measures are also discouraging exports of manufactured merchandise in a period when Zimbabwe needs to prepare for the Africa Continental Free Trade Area (AfCFTA).

Sustaining the parallel market
So far the auction platform has allocated US$1.9 billion to formal producers and businesspeople in the market since June 2020 versus formal demand for foreign currency exceeding US$5.5 billion in a year. This means that successful bidders only receive 20% to 30% of their foreign currency needs after about 2 months while daily revenues and the parallel market augment the difference. The export figure does not take into account smuggled merchandise which is not declared at customs or merchandise that is under declared for the purpose of paying less duty.

Zimbabwe earns more foreign currency (per capita) than regional peers such as Namibia, Botswana, Malawi, Zambia, Mozambique, Tanzania and Kenya. These countries do not have endemic foreign currency shortages because they have market driven foreign exchange markets. It is worth noting that foreign currency is a scarce resource which needs to be shared in every economy on the global scene, however the sharing can only be efficient if accompanied by a market determined rate where buying and selling margins are very thin to close huge arbitrage opportunities being enjoyed by the elite in Zimbabwe. To address the above inefficiencies, the central bank needs to state beforehand the exact amount of foreign currency available to bidders on auction and commit to settling winning bids within 3 days (T+3). This means the weekly auction should only be carried out if winning bids from the previous week are fully settled. The bank should also weed out producers and retailers (especially petroleum players) who sell their products exclusively in foreign currency and convert proceeds to local currency to place bids again.

The central bank needs to learn from past mistakes where fixing the exchange rate led to market instability and unintended consumption subsidies running into billions of dollars. Exporters and foreign currency holders need to be allowed to trade their foreign currency at market determined rates where the auction market is decentralized from central bank control. The central bank must emulate basic tenets of central bank intervention (open market operations) to mop up excess liquidity in order to manage inflation instead of pegging the exchange rate which has never been a sustainable intervention. Inflation is largely a function of money supply in Zimbabwe and the biggest underwriter to stability is the central bank itself, not a controlled rate. In conclusion, the current foreign currency allocation platform needs to be operated under a true Dutch Auction System to ensure sustainability.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email [email protected] or Twitter @VictorBhoroma1.

All articles and letters published on Bulawayo24 have been independently written by members of Bulawayo24’s community. The views of users published on Bulawayo24 are therefore their own and do not necessarily represent the views of Bulawayo24. Bulawayo24 editors also reserve the right to edit or delete any and all comments received.

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Rudie van Vuuren: Namibia co-hosting 2027 Cricket World Cup 'the biggest thing that will ever happen' – BBC News

Rudie van Vuuren playing both cricket

Namibian sporting icon Rudie van Vuuren believes his nation co-hosting the 2027 Cricket World Cup is ‘one of the biggest things that will ever happen to us’.

Van Vuuren, who played at both the cricket and rugby union World Cups in 2003, has been president of Cricket Namibia since 2018.

He says Namibia’s performances on the pitch in recent years played a big part in the country being awarded the hosting rights for the 2027 Cricket World Cup, along with neighbours South Africa and Zimbabwe.

“It’s massive and just for us as a nation. I think it’s one of the biggest things that will ever happen to us,” the 49-year-old told BBC Sport Africa.

“In 2003 when I played in the World Cup it was hosted between South Africa, Zimbabwe and Kenya but our performances on the field sort of shifted the mind towards Namibia, Zimbabwe and South Africa.

“For our economy it’s going to be a massive injection, for our cricket it’s going to be a massive injection.”

However, Van Vuuren admits that the biggest challenge that lies ahead is ensuring Namibia has the necessary cricket infrastructure in place.

At present there are only five cricket pitches in the country and only limited training facilities.

“That’s a big challenge for us at the moment. We are struggling to get the authorities on board,” he explained.

“There is land designated for development of an international facility. We have saved up money for it, so the news that we will be hosting the World Cup will hopefully shift the minds of powers that be in the right direction.

“We need an international standard stadium and facilities. It’s a massive economic opportunity for us so hopefully the news will get through to them.

“The facilities are not bad but at the moment we are going to struggle to host the Cricket World Cup because of the absence of one big facility. By 2027 we really need to have a big stadium in place.”

Van Vuuren is expecting that any stadium used for the 2027 World Cup will be in the Namibian capital Windhoek.

Catalyst for diversity

Rudie van Vuuren

Van Vuuren is hoping that both the co-hosting of the 2027 finals and Namibia’s recent successes at the T20 World Cup, where they reached the Super 12s stage for the first time, will be a catalyst for Namibian cricket to become more diverse.

“One of the biggest challenges we are facing in Namibia is cricket is still seen as a white man’s sport and that’s a perception we want to change,” he explained.

“We have some fantastic non-white players coming through and now development programs are escalating every day. So, that tournament will just help develop cricket and find those amazing athletes that we have in rural areas of Namibia.”

Diversity and infrastructure are not the only things the sportsman, who is also a fully-qualified medical doctor and conservationist, is hoping to improve over the next few years.

“From team level to board level we need to recalibrate and re-strategise because success brings new challenges,” he said.

“For us as the board – as the leadership of Cricket Namibia – we need to know how do we increase the pool of players, how do we strengthen our pipeline, how do we scout for talent in this very remote country?”

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Southern Africa Set for Economic Rebound, but Impact of Covid-19 Lingers – ZAWYA

African Development Bank Group (AfDB)

Southern Africa is set for an economic rebound in 2021 and 2022, provided the Covid-19 pandemic tapers off, according to a report published by the African Development Bank (www.AfDB.org).

Like elsewhere on the continent, the pandemic will be a deciding factor in the region’s economic fortunes. If all goes well, and that includes a successful vaccination campaign and health measures such as social distancing and wearing masks, Southern Africa is projected to grow 3.2% in 2021 and 2.4% in 2022, according to the Bank’s Southern Africa Economic Outlook.

These projections are a far cry from 2020, when the region suffered a 6.3% contraction – by far the worst in Africa. Central Africa experienced the second-worst regional economic contraction at 2.6%.

Leila Mokaddem, the Bank’s Director General of the Southern Africa Region, said the pandemic had left a deep impression among the 13 nations covered by the Southern Africa Economic Outlook.

“The magnitude of the socioeconomic impact of the Covid-19 pandemic on countries in Southern Africa cannot be overemphasized – rising poverty, inequality and unemployment, among other economic malaise,” Mokaddem said at the launch of the Southern Africa Economic Outlook last month.

Mokaddem told government officials, economists and partner representatives who attended the session: “Despite the current low infection rates, the situation remains fluid given the threats of new Covid-19 waves and virulent variants.”

Pandemic-induced effects on output were more pronounced in countries that strongly depend on tourism, such as Botswana, Mauritius, Namibia, and Zimbabwe. The same was true for countries that rely on commodity exports, the Outlook pointed out.

Growth prospects varied but positive

Going forward, lack of economic diversity could stifle the recovery. Commodities play an oversized role in many of the region’s economies, the Bank’s analysts point out, citing Angola, Mozambique and Zambia as examples.

Dr. Emmanuel Pinto Moreira, Director of the Bank’s Country Economics Department, said the region’s economic performance fit in with the larger picture in Africa and the world as a whole. All but one region on the continent, East Africa, recorded growth in 2020. Overall, Africa experienced one of its worst recessions in decades.

“The good news is that there’s a recovery and the outlook is positive…The very good news is that the three largest economies – Nigeria, South Africa, and Egypt – are recovering,” said Moreira, lead author of the report, a regional offshoot of the Bank’s African Economic Outlook.

Three factors explained the recovery, Moreira said: a rebound in commodities, a pick-up in tourism and sound policies.

Slow growth in South Africa – the region’s largest economy – spilled over into its neighbours, which rely on the former for manufactured goods and as a market for their production inputs. Nevertheless, the report notes, regional inflation is expected to moderate from an estimated 14.2% in 2020 to 9.4% in 2021 and 6.5% in 2022, improving growth prospects.

The region’s debt outlook is of moderate concern, considering that pandemic-related expenditure lead to a surge in public spending. Gross government debt is expected to rise only mildly, the Outlook predicts.

Bank experts propose a number of short, medium and long-term policies to nurse the economies of Southern Africa back to health. These include targeted support for badly hurt sectors such as tourism, removing trade bottlenecks, and introducing efficient social protection programs.

In the report, the 13 countries comprising Southern Africa are: Angola, Botswana, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Sao Tome&Principe, South Africa, eSwatini, Zambia and Zimbabwe.

Read the full report here (https://bit.ly/3ov1ULL).

Distributed by APO Group on behalf of African Development Bank Group (AfDB).

Contact:
Gershwin Wanneburg
Communication and External Relations Department
African Development Bank
E-mail: [email protected]

About the African Development Bank Group:
The African Development Bank Group (AfDB) is Africa’s premier development finance institution. It comprises three distinct entities: the African Development Bank (AfDB), the African Development Fund (ADF) and the Nigeria Trust Fund (NTF). On the ground in 37 African countries with an external office in Japan, the AfDB contributes to the economic development and the social progress of its 54 regional member states.
For more information: j.mp/AfDB_Media

© Press Release 2021

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Southern Africa Set for Economic Rebound, but Impact of Covid-19 Lingers – The Herald

The Herald

African Development Bank Group (AfDB)

African Development Bank Group (AfDB)

Southern Africa is set for an economic rebound in 2021 and 2022, provided the Covid-19 pandemic tapers off, according to a report published by the African Development Bank (www.AfDB.org).

Like elsewhere on the continent, the pandemic will be a deciding factor in the region’s economic fortunes. If all goes well, and that includes a successful vaccination campaign and health measures such as social distancing and wearing masks, Southern Africa is projected to grow 3.2% in 2021 and 2.4% in 2022, according to the Bank’s Southern Africa Economic Outlook.

These projections are a far cry from 2020, when the region suffered a 6.3% contraction – by far the worst in Africa. Central Africa experienced the second-worst regional economic contraction at 2.6%.

Leila Mokaddem, the Bank’s Director General of the Southern Africa Region, said the pandemic had left a deep impression among the 13 nations covered by the Southern Africa Economic Outlook.

“The magnitude of the socioeconomic impact of the Covid-19 pandemic on countries in Southern Africa cannot be overemphasized – rising poverty, inequality and unemployment, among other economic malaise,” Mokaddem said at the launch of the Southern Africa Economic Outlook last month.

Mokaddem told government officials, economists and partner representatives who attended the session: “Despite the current low infection rates, the situation remains fluid given the threats of new Covid-19 waves and virulent variants.”

Pandemic-induced effects on output were more pronounced in countries that strongly depend on tourism, such as Botswana, Mauritius, Namibia, and Zimbabwe. The same was true for countries that rely on commodity exports, the Outlook pointed out.

Growth prospects varied but positive

Going forward, lack of economic diversity could stifle the recovery. Commodities play an oversized role in many of the region’s economies, the Bank’s analysts point out, citing Angola, Mozambique and Zambia as examples.

Dr. Emmanuel Pinto Moreira, Director of the Bank’s Country Economics Department, said the region’s economic performance fit in with the larger picture in Africa and the world as a whole. All but one region on the continent, East Africa, recorded growth in 2020. Overall, Africa experienced one of its worst recessions in decades.

“The good news is that there’s a recovery and the outlook is positive…The very good news is that the three largest economies – Nigeria, South Africa, and Egypt – are recovering,” said Moreira, lead author of the report, a regional offshoot of the Bank’s African Economic Outlook.

Three factors explained the recovery, Moreira said: a rebound in commodities, a pick-up in tourism and sound policies.

Slow growth in South Africa – the region’s largest economy – spilled over into its neighbours, which rely on the former for manufactured goods and as a market for their production inputs. Nevertheless, the report notes, regional inflation is expected to moderate from an estimated 14.2% in 2020 to 9.4% in 2021 and 6.5% in 2022, improving growth prospects.

The region’s debt outlook is of moderate concern, considering that pandemic-related expenditure lead to a surge in public spending. Gross government debt is expected to rise only mildly, the Outlook predicts.

Bank experts propose a number of short, medium and long-term policies to nurse the economies of Southern Africa back to health. These include targeted support for badly hurt sectors such as tourism, removing trade bottlenecks, and introducing efficient social protection programs.

In the report, the 13 countries comprising Southern Africa are: Angola, Botswana, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Sao Tome&Principe, South Africa, eSwatini, Zambia and Zimbabwe.

Read the full report here (https://bit.ly/3ov1ULL).

Distributed by APO Group on behalf of African Development Bank Group (AfDB).

Contact:
Gershwin Wanneburg
Communication and External Relations Department
African Development Bank
E-mail: [email protected]

About the African Development Bank Group:
The African Development Bank Group (AfDB) is Africa’s premier development finance institution. It comprises three distinct entities: the African Development Bank (AfDB), the African Development Fund (ADF) and the Nigeria Trust Fund (NTF). On the ground in 37 African countries with an external office in Japan, the AfDB contributes to the economic development and the social progress of its 54 regional member states.
For more information: j.mp/AfDB_Media

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