“More sources of money supply have yet to be sealed”

Professor Mthuli Ncube

HARARE – The government, which recently admitted that it is partly responsible for the instability of the currency and prices in the economy, still has work to do as there are several other sources of money supply that need to be eliminated, can reveal Business Weekly.

Over the past two years or so, authorities have pointed the finger at other economic actors for fueling exchange rate and price instability, but with little success.

But a fortnight ago the government decided to bite the bullet and accused its surrogates of being the main contributors to the price and exchange rate distortions that characterized the Second Republic.

In a series of letters and statements, the Minister of Finance and Economic Development, Professor Mthuli Ncube and his Permanent Secretary, George Guvamatanga, acknowledged the government’s role in price and exchange rate instability by paying goods and services at ridiculously inflated prices by most of its suppliers.

Both revealed that the government, which is the biggest buyer in the economy, accounting for at least 70%, was undisciplined in its spending and therefore not getting value for money.

Guvamatanga’s letter reads: “Treasury has noted with concern that Ministries, Departments and Agencies (MDAs) are submitting payroll cycles for cash disbursement for goods and services procured using parallel market rates .

“As you know, such pricing frameworks by suppliers of goods and services have not only caused inflationary pressures, but also fueled parallel market activity.”

Together with President Mnangagwa, they immediately put an end to this spending spree ordering Ministries, Ministries and Government Agencies (MDAs) to revalidate all their contracts and align all invoices to the Willing Buyer’s Exchange Rate (WBWS) ). The government immediately stopped making any payments until the ordered action was taken.

“In this regard, the Treasury is immediately suspending all payments to MDAs pending your submission of reports of the findings of the due diligence exercise on all ongoing and future contracts with particular focus on pricing,” Guvamatanga wrote.

The result was a halt in currency depreciation and, in some cases, an appreciation of the local currency.

Along with other measures, including the introduction of gold coins, the exchange rate remained stable in the parallel market, signaling the impact of the latest measures.

Prior to the new measures, the parallel market rate was threatening to hit $1,000 to the US$1, but has since found resistance at around $800 to the US$1 as trades take place for as low as $700.

However, in the official market, the WBWS interbank rate, the local dollar continued to depreciate, leaving the central bank and by extension the government facing huge financial losses.

After starting the year officially trading at $108 to the US$1, the local unit was trading at $521 to the US$1 on Wednesday this week.

Guvamatanga said there are still structural issues within the economy that still need to be resolved for long-term price and exchange rate stability.

He said the country still had monopolies which still posed a threat to economic stability and revealed that there were plans to develop and support new entities to challenge these monopolies.

There are several other areas where huge foreign exchange losses are likely to be incurred as a result of local currency depreciation.

“The backlog of foreign currencies on the auction system and the loans obtained by the central bank and granted to companies at lower exchange rates are good examples. The government now needs large amounts of local currency to fulfill these obligations,” Guvamatanga said.

In an earlier interview with this publication, RBZ Governor Dr. John Mangudya said the losses, like any other central bank debt, will be borne by the government.

“It’s called FX losses, it’s also true for blocked funds, blocked funds were 1:1, but we buy currencies at current exchange rates,” he said then.

The foreign exchange auction system has accumulated a backlog for years after the central bank auctioned off foreign currency that was not readily available. This means that a forex bidder would pay less than what the RBZ ultimately pays to buy the foreign currency weeks or months later to cover the backlog.

Part of the foreign currency backlog relates to funds allocated when the exchange rate was between $124.0189 (bid 83) and $173.2685 (bid 93), but the apex bank would buy foreign currency at $521 at the Wednesday’s WBWS exchange rate.

According to the medium-term monetary policy statement, the central bank has a backlog of major auctions 83 to 93, amounting to $169 million.

Assuming the current backlog is for forex allocated at an average of $148.50, the exchange loss would amount to over $63 billion (US$121 million).

While some see it as a simple accounting entry, pumping the $88 billion needed into the market to buy the forex owned by successful importer deals would destabilize the market, experts say.

The central bank negotiated and accessed offshore lines of credit from Afreximbank with the aim of providing liquidity support to the currency auction system, refinancing certain existing obligations and meeting the balance of payments requirements of the country.

In 2021, the Bank negotiated and accessed external facilities worth $1.8 billion from new and existing offshore revolving facilities from Afreximbank (including letters of credit facilities), Gemcorp, Trade and Development Bank (TDB) and other creditors to support the exchange. auction system, refinance existing bonds and meet the country’s balance of payments requirements.

The country would pay US$25 million per month for foreign currency borrowed from Afreximbank. If these funds were borrowed and extended to local businesses at lower exchange rates, huge sums are now needed to buy back foreign currency and meet Afreximbank’s debt obligations.

Again, such large sums are as good as injecting cash into the economy for foreign currency holders who do not necessarily need the local currency but are compelled by law to hand over some of the proceeds. export and local currency earnings to the central bank at the prevailing WBWS exchange. assess. – Weekly business

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