eBusiness Weekly
Kudzanai Sharara
The removal of subsidies on fuel, maize and several other products, might be the remedy that is needed for the foreign currency exchange rate to stabilise or even firm up, economist John Robertson has said.
He said the reason why Government had an insatiable appetite for foreign currency in the past was to fund various subsidies from fuel and electricity to agricultural inputs.
Subsidies were killing the circulation and availability of foreign currency to other economic players, he said.
As admitted by Finance and Economic Development Minister Mthuli Ncube in his 2020 National Budget, subsidies on fuel, electricity and agriculture “have, in the past, led to large and often unpredictable expenses”.
They also led to market distortions on the foreign currency market as Government, with its large appetite, ended up crowding out the private sector from accessing forex.
It also resulted in the private sector competing for foreign currency on the parallel market and in the process pushing up exchange rates and bringing instability that forced exporters to want to hold on to their forex earnings for a bigger pay check resulting in a weakening local currency.
Market distortions associated with subsidies present an additional risk to macro-economic and fiscal stability, Minister Ncube admitted in his budget statement.
To this end he proposed an end to subsidies on fuel and electricity as well as grain subsidies for maize and wheat.
“Government will apply a single exchange rate regime throughout all sectors of the economy to avoid implicit subsidies arising from preferential allocation of foreign exchange at below-market exchange rates, as it was previously the case for fuel imports and other prioritised goods,” said Minister Ncube.
Robertson said this should be a good starting point to bring stability to the foreign exchange rate.
With the RBZ’s appetite now reduced, there is now no need for exporters to fear forex will not be available when needed. Market forces are efficient enough to determine who gets what and at what time, said Robertson.
He said the current black market rate, which is a 20 to 25 percent premium to the interbank rate is a result of artificial scarcity of forex and lack of controls.
“Banks are complicity in all this mess as they continue to channel foreign currency away from the official interbank market towards the parallel market where they get higher margins.
“We also need more discipline and compliance by exporters without using force. We need to build confidence,” Robertson said.
The decision to do away with subsidies comes at a time the central bank and exporters are still at logger heads with regards on how foreign currency should be treated.
Miners are calling for increased retention thresholds while other exporters are also suggesting that there is no need for mandatory liquidation of export proceeds. Listed miner, RioZim, which says it is now back to paying for almost everything in US dollars and is therefore extremely short of US dollars, is on record saying “in the absence of either being allowed to retain and use 100 percent of its export proceeds or raise and use US dollars from shareholders, the Company’s position will continue to be extremely challenging.”
An executive with a local horticultural concern said 20 percent of export proceeds are mandatorily liquidated at the going exchange rate which implies a loss of 5 percent on turnover.
He said basic banking principles must be applied and let banks play their role while the RBZ plays its role of monitoring and supervision.
“When an exporter’s proceeds are in a Foreign Currency Account they can be utilised by economic players in need of forex. The reserve system also applies,” said the executive who asked not to be named.
Market watchers agreed and said the interbank should be the only system in use and Government should access forex through taxes, duties and levies and competitive bidding on the interbank system.
“A simple tax on interbank transactions could raise sufficient forex for Government in the long run as the market and economy grow,” said Walter Mandeya of Trigrams Investments.
He said it is wrong for Government to take what others have produced outside of the normal fiscal system.
“The RBZ is a monetary authority and not a revenue collector. So, while we acknowledge the challenges around forex, the RBZ should not be able to touch money that is not in the consolidated revenue accounts.
“Their role should be to persuade the markets through policy, directives, guidelines and market engagement to behave in ways that achieve their overall objectives.”
