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HomeBusinessGovt Is Driving Exchange Rate Movements: ZNCC

Govt Is Driving Exchange Rate Movements: ZNCC

Government’s short-term financing model for its on-going programs and developmental projects has been the major driver of the rapid depreciation in the local currency contrary to notions that economic saboteurs are at play, a leading business body has said.

In its submissions to the Ministry of Finance and Economic Development and the Reserve Bank of Zimbabwe (RBZ) the Zimbabwe National Chamber of Commerce (ZNCC) said Government is currently the major holder of Zimbabwean dollar deposits and lack of strategic disbursements of those funds into the market has been catastrophic.

This was in response to President Emmerson Mnangagwa’s interventions to the currency crisis which were announced over the weekend.

“Government is using short-term financing mechanisms to finance the Emergency Road Rehabilitation Programme, Construction of Dams and funding critical programmes like Census and bi-elections. The Zimbabwean dollar being paid by Government to the contractors is ending up chasing the greenback on the parallel market as they seek to preserve value,” said ZNCC in a paper released today.

“Therefore, the conclusion from the Government that negative economic sentiments not fundamentals are driving the economy is partially incorrect. The fundamentals such as money supply and foreign exchange management are misaligned and those are actually driving negative sentiments not blaming the adverse expectations.”

The local currency took off a radical downward path in April, losing around 50 percent of its value to currently trading around ZWL$ 400 against the American dollar on the alternative market.

Government is however convinced that the recent exchange rate movements are being driven by negative sentiments and economic agents as opposed to economic fundamentals.

Month-on-month inflation in April 2022 reached 15.5 percent gaining 9.2 percentage points on the March 2022 rate of 6.3 percent. The year-on-year inflation rate for the month of April 2022 as measured by the all items Consumer Price Index stood at 96.4 percent raising fears that the country could be sliding into the pre-dollarization economic crisis of 2008.

Matters are compounded by the fact that authorities seem to be inconsistent in their policies after the Central Bank reintroduced the interbank market last week after having disbanded it prior to the establishment of the auction system.

“The re-introduction of the Interbank Foreign Exchange Market entails that we now have three prices for the local currency as determined on the Foreign Exchange Auction System, the Interbank Forex Market and the Parallel Foreign Exchange Market. Surprisingly, the commodity being sold is one, and also produced by one Central Bank. It’s also a fallacy to anticipate that the Interbank Rate and Auction Rate will converge overtime since the auction has been the loophole for arbitrage opportunities,” said ZNCC.

The business body further castigated government stance on suspending lending by banks as a stop gap measure against what it called speculative borrowing which was driving the exchange rate.

“The Government has suspended banking but banks remain intact. This legitimizes a parallel banking system with usurious interest rates and no investor would be attracted to such an economy where lending can be suspended overnight. This is a step back in the “Zimbabwe is open for business” mantra.”

This is  not the first time a business organisation has cautioned government this year over the worsening economic environment after the Confederation of Zimbabwe Industries warned of immediate crash of the Zimbabwe dollar, criticism the Central Bank quickly rubbished as based on speculation.

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