Delays in disbursements of foreign currency allotted through the auction trading system are expected to improve for the better following decisions by the authorities to adopt a three-pronged approach that will see more funds being channelled into the system, not only to clear the backlog, but to make sure foreign currency is readily available for successful bids.
Since its introduction towards the end of June 2020, the foreign currency auction system has been credited for bringing exchange rate and price stability in the economy.
Following currency reforms embarked on since October 2018, which culminated in the reintroduction of its local currency, Zimbabwe had struggled with its exchange rate, with the premium gap between the official exchange rate and the parallel market rate widening above 300 percent.
The introduction of the auction system, however, saw this gap narrowing to approximately 30 percent currently, while the exchange rate has been largely stable below 85 Zimbabwe dollars to US$1.
On the other hand, the annual inflation rate, which had raced to a peak of 837 percent in July 2020, has since narrowed to 194 percent at the last count in April 2020.
Most listed companies, in their economic review commentaries, have acknowledged and attributed the stability of both the exchange and inflation rate to the introduction of the foreign currency auction system.
However, that is not to say the auction system has been flawless. Some successful bids have had to wait much longer to access the funds.
An executive from one of the country’s biggest food processors, who requested not to be named, said his company is yet to access foreign currency successfully bid nine weeks ago.
In her presentation at the Agro Processing Business Forum held two weeks ago, Minister of Industry and Commerce Dr Sekai Nzenza, acknowledged that players that fall under her ministry were faced with foreign currency shortages and delays in disbursements, which in the process affected raw material supply and capital investment initiatives.
Delays in foreign currency disbursements, market watchers say, forces desperate importers to seek foreign currency from alternative markets and in the process pushing up parallel market exchange rates.
To deal with the challenges, Treasury and the Reserve Bank of Zimbabwe, have since come up with a three pronged plan that could help clear the backlog and also make sure foreign currency is readily available for successful bidders.
To deal with the backlog, the central bank is set to allow banks to keep 50 percent of the surrender requirements from exporters, and use the foreign currency to clear the backlog.
Zimbabwean exporters are required to surrender 40 percent of all their foreign currency earnings to the RBZ in exchange of the local Zimbabwe dollar at the official exchange rate currently sitting at 84.5032 as of Tuesday this week.
In addition to the above measure, Government has also agreed to sell foreign currency to the central bank via the auction system.
Confirming the developments, RBZ Governor Dr John Mangudya told Business Weekly that the central bank has also put in place plans to draw down foreign currency from existing lines of credit.
“We have taken a three pronged approach, and we believe we will be able to solve the problem that mainly exist at big banks that also serve large scale importers.”
“We are going to allow banks to use 50 percent of the foreign currency surrender requirements from exporters (40 percent of foreign currency inflows), to clear the importers’ backlog,” Dr Mangudya said.
He added that the backlog mainly exists on the main auction that caters for big importers, while the SMEs foreign currency auction had no such problems.
Meanwhile, expectations are that the country’s much anticipated bumper harvest will reduce demand for imported food and related products toward other needy areas of the economy.
Last year Zimbabwe used more than US$500 million for the importation of grain such as wheat, maize and soya bean. More resources were also channelled towards the importation of other food related raw materials and finished products.
But with the country now confirming triple digit growth for most agricultural produce, the food import bill will certainly reduce.
To Dr Mangudya, this confirms what he has always said that the solution to the country’s foreign currency challenges is to increase local production and close the productivity gap.
“Here at the central bank we have always said what is lacking in this country is production, and you are right, we should be able to save foreign currency from this year’s agriculture production.”
According to official statistics, maize production is estimated at 2 717 171 tonnes, which is 199 percent higher than the 907 628 tonnes produced in the 2019/2020 season.
Soyabean production is expected to increase by 51 percent to 71 290 tonnes from 47 088 tonnes last year. Sugar beans production is estimated to increase by 142 percent and groundnuts by 139 percent.
The total cereal production projection is 3 075 538 tonnes, against a national cereal requirement of 1 797 435 tonnes for human consumption and 450 000 tonnes for livestock.
Dr Mangudya said the central bank will keep a close eye on import requirements and would encourage economic players not to import raw materials or products that are readily available in the country.
“Yes we might have to tweak our priority list and make sure we don’t import what is available locally,” he said.