Economic Updates - Featured - Top Stories - October 13, 2021

Increasing parallel market premium a cause of concern: CZI

The Confederation of Zimbabwe Industries (CZI) has implored the authorities to find a solution to the rapidly deteriorating exchange rate situation.

The apex organisation for Industry in Zimbabwe, the strong rebound in economic activity is now threatened by the unfolding instability in the currency market.

In a statement CZI said this instability has been primarily driven by the unrelenting increase in money supply, the arbitrage windows that policy seems to continue to create, increasing imports on the back of decreasing export competitiveness bulk payments for agriculture produce and to contractors.

“The pressure on the forex market has been made worse by long delays in settlement at the auction.

“This instability in the currency has prompted an aggressive administrative response from the authorities that, if continued, will send the economy into a hyperinflationary tailspin destroying all the gains of the previous twelve months,” read the statement.

The CZI also highlighted country still lacks a transparent formal foreign exchange market that responds smoothly to supply and demand for foreign exchange.

This has resulted in an increasing parallel market premium that is becoming a growing problem.

“In our initial engagements with the Reserve Bank we proffered and they indicated that they would implementing an action plan that, will result in the restoration of stability,” authored the CZI.

“The key elements of the plan are: auction only available foreign exchange and settle bids within two weeks at an absolute maximum, implement the standard rules of a Dutch auction meaning that higher bidders are allocated in full,” CZI said.

This will allow supply and demand to play its full role at the auction and make it a true price discovery mechanism and further tightening of monetary policy.

“These factors are the main drivers of the widening parallel market premium and with this widening premium arbitrage, distortions and inflation pressures are entrenching.

“This has also increased preference for the USD among economic agents making the ZWL$ vulnerable and the inflation environment precarious,” read the statement.

The report also stated that the parallel market premium is a cost of getting foreign currency from the alternative informal market, in the absence of a formal spot market.

“It is also an indicator of the possible erosion of value of foreign currency by simply trading on the official market.

“Trading on the parallel market is risky as it is illegal, but given the absence of an alternative formal spot market, it is often seen as worthwhile and sometimes necessary to undertake the activity,” read the statement.

 

 

 

 

 

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