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Industry Wants S.I 127 Suspended

The latest legal instrument -Statutory Instrument (S.I) 127 of 2021 meant to address exchange rate distortions by penalizing businesses not consistent with the ruling rate on the foreign currency auction market will create American dollar (USD) inflation and lower formal sector USD sales, the Confederation of Zimbabwe Industries (CZI) has warned.

The Reserve Bank of Zimbabwe (RBZ) ‘s foreign exchange auction rate (official rate) which government wants businesses to comply with is not reflective of the market, it argues.

The S.I has set hefty penalties for businesses that issue local currency receipts for foreign currency purchases, pricing goods and services above the ruling exchange rate, pricing of goods and services only in foreign currency and using the money obtained from the auctions for other purposes other than that stated on bids.

While these interventions were meant to rein in market indiscipline, the downside effects will hit hard on business players and the general economy that is gradually finding its feet due to improved circulation of the USD amid Zimbabwean dollar (ZWL) volatility.

“CZI believes that SI 127 should be immediately suspended,” the industry lobby group said in its policy response to the new regulations.

“The S.I will reduce the amount of foreign currency in the official and formal channels and create USD inflation to achieve a perceived required return by business.”

Already, since the S.I was announced last week some retailers have increased prices in local currency (ZWL) in order to sustain USD returns they realized prior to announcement of the S.I.

The problem emanates from the fact that the foreign exchange auction market rate which stands at ZWL$84/USD is widely perceived to be controlled and not market driven hence businesses were more persuaded by the black market rate.

Most businesses were using parallel rates of between ZWL$ 110-130 against the USD.

“The market believes that the auction is a controlled rate and therefore from the past we have seen that it looks for another reference point to determine a price. That will mean we are back to the dark days when the black-market rate anchors pricing. This market has thin volumes and is driven by rumors and speculation,” said CZI.

However, of major concern to industry is the effect this will have on the foreign exchange auction market where demand for foreign currency is expected to increase due to an envisioned decline in USD sales by companies.

The Central bank is already battling to timeously disburse foreign currency to winning bidders from the action system owing to limited foreign reserves.

Now as a result of USD inflation, consumer spending in foreign currency is expected to decline thereby weakening local companies’ capacity to self-generate hard currency to meet its payments to suppliers.

“(It will) bring businesses that previously were able to generate foreign currency into the auctions. These organizations were able to collect foreign currency from sales previously,” said CZI.

Monetary authorities are however confident that the latest S.I will instill market discipline by ending exchange rate distortions and also ensure that businesses that access foreign currency from the auction system put it to its intended use.

Since its reintroduction in 2019, the Zimbabwean dollar’s valuation has been subject to debate with government issuing a series of legal instruments to guard it from market speculation.

 

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