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Unitary exchange rate can end currency volatility — CZI – The Herald

The Herald

Business Reporter

THE Confederation of Zimbabwe Industries (CZI) says the lack of a unitary exchange rate lies at the heart of Zimbabwe’s currency challenges and the lobby group has called for the establishment of an efficient price discovery mechanism.

 Issues around price discovery dominated deliberations at the CZI 2021 manufacturing sector survey report launch on Wednesday as industry players urged the Government to come up with measures to address the exchange rate disparities in the market.

Businesses bemoaned dual exchange rate regime in the form of the auction and interbank rates while the existence of the parallel market exchange rate, illegally used to benchmark prices by businesses, further complicated things.

As such, industry players implored the Government to put in place an effective price discovery model to ensure convergence of the exchange rates.  

Government has, however, already started responding to calls by captains of industry and commerce, and also in view of dynamics in the market, to deflate speculative bubble in the equities market and stop the currency depreciation.

President Mnangagwa announced a raft of interventions at the weekend, which entailed a drastic cut in liquidity growth, suspension of bank lending, taxes on US dollar withdrawals and tightening trading conditions on the equities market.

Finance and Economic Development Minister Mthuli Ncube said the measures were designed to stabilise the exchange rate, lower inflation and engender confidence in the economy.

The Treasury chief said the Government was confident the measures would bear fruit, drawing parallels with success of interventions in 2020, particularly introduction of the auction system, which resulted in exchange rate stability and drastic fall in inflation.

Notably, Minister Ncube said the Government retained more measures and would unleash additional arsenal to tackle factors driving exchange rate volatility and inflation, including widespread indiscipline by economic agents.

At the start of the auction system, and a stable operating environment in 2021, the parallel market rate premium went down to as low as 20 percent, inflation trended downward while industrial capacity utilisation increased modestly.

Business leaders also said investments in new projects also increased, under a largely stable and predictable environment following policy measures introduced earlier in 2020, which may not be sustainable in an economy with multiple exchange rate.

Business leaders had reservations about the willing buyer willing seller system for foreign currency, saying it was not working efficiently.

Addressing the delegates on behalf of CZI president Kurai Matsheza, his deputy Victoria Jakazi said authorities should come up with effective exchange management, a position that would direct everything to fall into place.

“The fundamental issue is exchange rate management and we have been making this call for as long as we remember.

“We are convinced that convergence of the rates brings stability as this was achieved at the beginning of the auction when a large part of the economy was indifferent to holding Zimbabwe dollar.

“Efficient price discovery must be allowed and an efficient market established, as without doing this the authorities will be chasing symptoms which continue to mutate as long as the arbitrage windows remain open.

“Getting the price of foreign currency right is a fundamental matter of Zimbabwe’s economic development interest,” said Mr Matsheza.

CZI chairman for economics committee Jimmy Psillos said the Reserve Bank of Zimbabwe (RBZ) should calibrate the auction system to efficiently discharge its mandate to instil confidence in the economy and among the citizenry.

He further noted that delayed disbursement of auction funds was creating exchange losses as the rate did not remain static overtime.

“We need to have proper price discovery, it has been said over and over again, proper willing buyer willing seller, as we speak yesterday willing buyers and willing sellers were advised of the amount they should be willing to buy and sell at.

“In terms of the auction there is a need for confidence, think about what happens to confidence if we do not disburse the money within 14 days, backlog is the other thing, it creates exchange loss because we are talking of backlog as far as last year when the exchange rate was below $100, so the central bank will be fulfilling last year’s obligation at a depreciated rate, how is that gap going to be funded,” said Mr Psillos.

He said the Government should consider regulating payments made to major country projects as it was somehow contributing to the exchange rate spike.

Mr Psillos said individuals and companies were holding on to huge amounts of US dollars as hedging means due to lack of confidence.

“There are enough US dollars to keep the business operating, that’s the truth, it is just that people rather park their US dollars somewhere and borrow Zimbabwe dollars to keep operating than use their US dollars to transact, this is a vicious cycle we would want to break out of.

“These large RTGS payments through Government contracts is a big problem because we know that as soon as they get their money, they would want to preserve value, you pay a contractor how are they going to preserve their value.

“These payments have to be carefully calibrated because you know that if you pay a certain amount to the market it will react and react negatively,” he added.

Archie Dongo, a member of the CZI economics roundtable, said 2022 had started on a negative note, as it was characterised by disposable income contraction due to sustained inflation increase, which has led to pricing challenges.

Mr Dongo noted that the manufacturing sector was covering its foreign currency requirements through sales in hard currency.

“As we saw, manufacturers are raising forex through US dollar sales to cover about 60 percent of the deficit (of their forex needs) identified by the survey. When you see products being sold only for US dollars you need to go back through the chain and sort it out. We are only seeing the results of what has been happening throughout the chain.

 “With spontaneous dollarisation along the chain manifesting itself on formal shop shelves, this is threatening the relationship between formal retail and manufacturers as it creates a preference for informal channels on the part of manufacturers,” said Dongo.

“Continued existence of arbitrage opportunities arising from foreign exchange management regime is causing damage and disruption of our orderly distribution channel due to informalisation,” he said.

With regards to currency manipulation, CZI council member and Dairibord holdings limited chief executive

Mr Mandiwanza

implored the Government to face the delinquents head-on to nip the recurring arbitrage issues in the bud.

“If there are offenders in the system it does not matter whether they are from business or from the streets, the government’s role is to deal with those offenders, and business will always stand on the side of the law, we cannot try to deal with an issue by hiding the very offenders.

“If they are taking money from the auction going to ‘burn’ it at the Zimbabwe Stock Exchange, deal with them because they are known, the RBZ has the capacity to track each individual offender, the bank’s know your customer knows who is doing what, deal with them do not punish all of us,” said Mr Mandiwanza.

According to the business leaders, the first quarter of 2022 was characterised by several challenges, which included high costs of inputs due to surging inflation which was growing the business’s inability to have pricing to replace stocks.

The business leaders also lamented diminished export competitiveness attributable to heavy taxing on exporters as well as the detrimental parallel market exchange rate premium on surrender requirements.

They also decried policy that subsidises imported industrial products, which are competing unfairly for supermarket shelf space with locally manufactured goods and holding the potential to accelerate deindustrialisation.

Players however, cited the need to ensure that the positive momentum gained in 2021 is maintained. It is important to ensure the operating environment is stable, especially bringing finality to the currency and inflation challenges.

Zimbabwe’s manufacturing sector’s capacity utilisation for 2021 grew to 56,52 percent from 47 percent in 2020 spurred by notable investments by companies.

The 56,25 percent growth in manufacturing sector capacity utilisation is the highest in 10 years after a 57,2 percent growth in 2011 owing to efforts being directed towards making the country a production hub again.

2020 capacity utilisation stood at 47 percent from 36,4 percent in 2019.

According to the survey, a total of $147 million was invested by companies in the manufacturing sector during 2021, which saw  additional capacity of 25, 6 percent being created.

Roughly 37, 8 percent of the manufacturing sector players undertook some form of capital expenditure to increase their production capacity in 2021.

About 56 percent of the surveyed firms registered growth in industrial capacity utilisation while 26 percent saw a decrease in the year.

Eighteen percent remained flat as their output neither increased nor declined.

The drinks and tobacco segment had the foremost growth in output at 82 percent, followed by the wood and furniture sector.

The other notable sub-sector growth was seen in the chemicals and petroleum segment, which recorded a 64 percent average capacity utilisation followed by clothing and footwear whose capacity utilisation grew to 60 percent.

 “The total amount of investment that was carried out in 2021 to increase capacity by surveyed firms amounted to $147 million.

“According to the survey 37,8 percent of the manufacturing sector undertook investments to increase their production capacity in 2021,”

According to the survey 37, 8 percent of the manufacturing sector undertook investments to increase their production capacity in 2021,” said Confederation of Zimbabwe Industries Chief economist Dr Cornelius Dube.

Mr Dube

The paper printing and publishing sector had the highest additional capacity at 50,6 percent followed by the chemicals and petroleum products segment at 30 percent.

 Notable efforts towards adding capacity were made in the non–metallic mineral products and the drinks – tobacco segments which recorded 29 percent and 28 percent growth respectively.

However, according to the CZI survey, inclusion of small-scale players weighed down capacity utilisation.

19,19 percent new jobs were created in the year against 16 percent that was retrenched.

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Market Watcher: Rand gains ground – Moneyweb

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Global shares trade lower as inflation worries cloud outlook – The Zimbabwe Mail

A currency trader talks on the phone at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Thursday, Feb. 24, 2022. Asian stock markets followed Wall Street lower Thursday as anxiety about a possible Russian invasion of Ukraine rose. (AP Photo/Ahn Young-joon)

TOKYO (AP) — Global shares declined Tuesday as worries over inflation tempered optimism over President Joe Biden’s remark that he was considering reducing U.S. tariffs on Chinese imports.

European shares fell in early trading, with France’s CAC 40 down 1.3% at 6,275.73. Germany’s DAX dipped nearly 1.0% to 14,038.93, while Britain’s FTSE 100 shed 0.7% to 7,460.16. The future for the Dow industrials was 0.8% lower while the S&P 500 future slipped 1.3%.

On Monday, the S&P 500 jumped 1.9%, the Dow Jones Industrial Average rose 2% and the Nasdaq climbed 1.6%. The Russell 2000 gained 1.1%.

Biden, who announced a new economic and trade initiative with the region while on a visit to Japan, confirmed to reporters that he planned to discuss the issue of punitive tariffs imposed on China during former President Donald Trump’s administration with Treasury Secretary Janet Yellen once he returns to Washington.

“I’m talking with the secretary when I get home. We are considering it,” Biden said.

The comments raised optimism over the potential for an easing of tensions between the world’s two biggest economies, but not all were convinced.

“Talks of reducing tariffs on China’s exports have surfaced before and the lack of any concrete follow-through remains an element of disappointment for markets,” said Yeap Jun Rong, market strategist at IG in Singapore.

Biden joined leaders of Japan, Australia and India in Tokyo for a summit of the “Quad,” or the Quadrilateral Security Dialogue, where Biden made the case that the world has a shared responsibility to do something to assist Ukrainian resistance against Russia’s aggression. The summit came on the final day of Biden’s first trip to Asia as president.

Investors are keeping an eye on the impact of the war in Ukraine on commodity prices and the possible blow to global economic growth from pandemic lockdowns in China.

Japan’s benchmark Nikkei 225 lost 0.9% to 26,748.14. Australia’s S&P/ASX 200 slipped 0.3% to 7,128.80 and South Korea’s Kospi sank 1.6% to 2,605.87. Hong Kong’s Hang Seng shed 1.8% to 20,112.10, while the Shanghai Composite declined 2.4% to 3,070.93.

Investors fear the U.S. central bank could go too far in raising rates or move too quickly. That could slow business activity and potentially bring on a recession. On Wednesday, investors will get a more detailed glimpse into the Fed’s decision-making process with the release of minutes from the latest policy setting meeting.

Technology shares that gained hugely during the pandemic are now taking the brunt of selling thanks to their hefty prices. Casting a shadow, social media and camera maker Snap Inc. surprised investors with a warning late Monday.

“Snap’s stock price went snap, crackle, pop, as it fell by over 30% in extended trading after the CEO, in a note to employees, said it would miss quarterly guidance on growth and revenues,” Jeffrey Halley of Oanda said in a commentary.

In premarket trading Snap’s shares were down 28% at $22.47 early Tuesday.

Wall Street will get a few economic updates this week from the Commerce Department. On Thursday it will release a report on first-quarter gross domestic product and on Friday it will release data on personal income and spending for April.

In energy trading, U.S. benchmark crude lost 75 cents to $109.54 a barrel in electronic trading on the New York Mercantile Exchange. It added 1 cent to $110.29 per barrel on Monday. Brent crude, the international standard for pricing, fell 83 cents to $112.59 a barrel.

In currency trading, the U.S. dollar edged down to 127.37 Japanese yen from 127.78 yen. The euro cost $1.0717, up from $1.0688.

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RBZ mops up ZW$31,6 billion in four months – New

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By Alois Vinga

THE Reserve Bank of Zimbabwe (RBZ) managed to mop up excess liquidity amounting to ZW$31,6 billion in the last four months of 2021 as the monetary authority upped the gear towards preserving the local currency’s stability.

Excess liquidity/cash position is when the balance exceeds the actual working capital cash needed, thereby becoming excess cash, or cash that is not necessary to the firm’s financial operations unless it is reinvested for other purposes.

The monetary authorities believe that if such balances are not mopped, several companies may be tempted to invade the parallel market and destabilise exchange rates for speculative purposes.

The RBZ has been implementing the excess cash mop up exercise through the issuance of Open Market Operations (OMO) securities through Non-Negotiable-Certificates of Deposits and Savings, which offers banks the opportunity to deposit excess cash with the central bank.

“During the quarter, OMO securities issued by the RBZ rose from ZW$41, 19 billion in the third quarter to ZW$72, 82 billion in December 2021, thus mopping up excess liquidity amounting to ZW$31,63 billion from the market during the quarter under review,” latest RBZ statistics said.

The period also saw reserve money stock stood at ZW$25,5 billion in the fourth quarter of 2021, compared to the target of ZW$28,9 billion, which translated to a quarterly growth of -1.14%, against a targeted growth of 10%.

“The reserve money quarter- on quarter growth target was reduced from 20% to 10%, in the fourth quarter of 2021.The quarterly growth in reserve money was contained within target during the fourth quarter of 2021,” said RBZ.

The lower reserve money stock, in part, reflected liquidity mopping by the Central Bank through open market operations.

“Mopping was largely through issuance of securities (non-negotiable certificates of deposits and savings bonds), supported by the liquidity withdrawing impact of net Government revenue collections and net foreign exchange selling by the Reserve Bank,” the central bank said.

Economic analyst, Prosper Chitambara, said the sustained trend is a step in the right direction, but hinted that deeper reforms are still required if long term benefits are to be achieved.

“The quantum of mopped up excess cash reflects the Monetary Policy stance which the RBZ is pursuing. This will obviously reign in the parallel market exchange rate volatility.

“However, more still needs to be done as far as maintaining money supply growth at sustainable levels if long term economic stability is to be achieved,” he said.

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