RBZ intervenes to end attacks on ZiG

Debra Matabvu and Standrick Chagadama

THE Reserve Bank of Zimbabwe (RBZ) will intervene to defend the local currency — Zimbabwe Gold (ZiG) — against speculative attacks through injecting foreign currency into the interbank market and enhancing monitoring of daily money supply conditions.

Monetary authorities believe ZiG is weakening on the parallel market because of speculative tendencies by some market players.

The official exchange rate currently stands at ZiG13,58 to the United States dollar.

However, the parallel market is offering premiums of up to 70 percent.

Some retailers have been increasingly indexing prices to parallel market rates, which has resulted in discomfort for consumers.

RBZ Governor Dr John Mushayavanhu said, despite the increase in foreign currency inflows, pressures on the exchange rate in the parallel market remain high.

The country’s foreign currency receipts rose by 9,5 percent to US$6,15 billion during the first six months of this year, compared to US$5,61 billion over the same period last year.

“The depreciation on the parallel market is, however, a result of transitory foreign currency pressures in the multiple-currency system.

“It should be understood that the parallel market rates presumed to be obtaining in the market are just quoted rates and there are no meaningful trades taking place,” he said.

“However, these quotes tend to influence the trading sector to increase prices to mimic the parallel market, where there is no significant trading.”

The negative expectations and speculative tendencies, he said, have resulted in high foreign currency demand on the parallel market despite an increase in foreign currency inflows.

“The challenge of adverse expectations and speculative tendencies among economic agents has, to a large extent, been compounding the demand pressures in the forex market,” he added.

“The high foreign currency market demand and pressures on the parallel exchange rate are occurring at a time when the country has been recording increased levels of foreign currency receipts, which clearly shows that the pressures are a result of adverse expectations in the forex market.”

He, however, said various interventions recently introduced will halt the temporary devaluation of ZiG.

The Bankers Association of Zimbabwe (BAZ) recently agreed to increase the allocation of the weekly foreign currency supply for importing raw materials.

“The Reserve Bank has responded to the increase in demand of foreign currency through the recent injection of US$50 million into the interbank foreign exchange market,” Dr Mushayavanhu said.

“As a result, the parallel market exchange rate has started to moderate from a peak of ZiG23 to ZiG24 per US dollar, to narrower parallel market premiums.

“The Reserve Bank has thus made commitments to work closely with the BAZ to have consistent interventions in the market and resolutely address any emerging pressures.”

The central bank, Dr Mushayavanhu added, will further closely monitor and conduct physical verifications to ascertain that foreign currency interventions are efficiently applied and that there are no speculative tendencies in foreign currency demand.

“The Reserve Bank will also closely watch money supply developments and liquidity conditions, in line with the daily optimal liquidity levels . . .

“In this regard, excess liquidity beyond the daily optimum level will be mopped up from the market through issuance of non-negotiable certificates of deposit.”

Recent amendments to the country’s corporate income tax laws are also expected to boost activity on the interbank market.

“The recent announcement by Government in the Mid-Term Fiscal Policy Review to amend the corporate income tax legislation to allow corporate income tax in both local and foreign currencies on a 50:50 basis will increase the foreign currency sales through the willing buyer, willing seller in the interbank market, as traders seek to raise the required ZiG to meet their local currency tax obligations.”

The central bank also believes the payment of all presumptive taxes in ZiG, regardless of the currency of trade, as well as the payment of customs duty in the local currency, will assist in creating demand for the local unit.

Confederation of Zimbabwe Industries chief executive officer Ms Sekai Kuvarika said the increase in money supply had pushed the parallel market rate.

“According to central bank numbers, in March, the local currency in circulation was ZiG620 920 000, and by end of June, it was ZiG12 496 322 000,” she said.

“This is aggravated by the shortage of foreign currency on the formal market, where manufacturers are failing to settle raw material imports, yet some of them are over 70 percent import-dependent for raw materials and intermediate goods.”

Consumer Protection Commission chairperson Dr Mthokozisi Nkosi said: “A general increase has been observed. Industrialists have cited the shortage of foreign currency as one of the reasons behind the price movements.”