BY ETimes

The Old Mutual Investment Group (OMIGZIM) says the local currency will remain under pressure on the parallel market, sustaining high inflationary concerns in the near term. The Zimbabwean dollar is officially trading at 90 to the US dollar and at 80x on the black market.

In a bid to clear the auction backlog and strengthen the ZWL, the central bank instituted a raft of measures which includes mopping up excess liquidity in the financial system, threatening businesses indexing prices of goods and services at parallel market exchange rates and arresting individuals involved in illegal forex trading.

However, since then the local currency continued to trade weaker on the black market.

“Measures recently introduced by authorities to curtail illegal foreign currency trading and the use of parallel market rates in pricing are likely to further dent confidence in the local currency and negatively affect economic activities, in the absence of adequate funding on the foreign currency auction system,” OMIGZIM said in its third quarter report.

The apex bank had initially projected inflation to close the year between 25-35%. The forecast, however, was revised to between 35-53%, citing the impact of parallel market exchange rates on prices. Inflation is projected to close the year at about 55%. 

Monetary authorities imagined that clearing excess liquidity would reduce ZWL balances, ostensibly anchoring demand for foreign currency on the parallel market. But, OMIGZIM said on paper, the policy measure appears complex.

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“It will be interesting to know how authorities are going to determine the excess funds. In addition, corporate bank balances are usually transitory in nature as the funds are largely for working capital purposes.

“Exchanging cash for an instrument may complicate working capital management for businesses and ultimately disrupt production,” said OMIGZIM.

To open market operations, the RBZ committed to clear the foreign currency auction settlement backlog which has reportedly deteriorated to over 10 weeks. The sources of funding to clear the backlog were unclear with possibilities of RBZ utilising the recently allocated International Monetary Fund Special Drawing rights to bankroll the auction, according to OMIGZIM.

Of late, RBZ has partly attributed the backlog to malpractices by certain entities that were sponsoring multiple bids under the auction system.

“Clearing the backlog is important to build confidence in the local currency and curtail exchange rate pass-through effects on inflation.”

It said the performance of the official foreign exchange auction market and the supply of foreign currency in the economy are key determinants of the direction of macro-economic variables in the outlook.

This is in sync with Finance Minister Mthuli Ncube’s sentiment that the illegal trade in foreign currency and pegging of prices of goods and services at black market rates have created downside risks to macro-economic stability as well as eroding domestic and international competitiveness – Harare

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