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CZI calls for two-tier forex exchange rate

By Golden Sibanda

Industrial lobby group, Confederation of Zimbabwe Industries (CZI), has proposed the adoption of a two-tier exchange rate management regime, formed from the combination of floating and crawling peg systems, to facilitate formal access to foreign currency by businesses.

Finance Minister Mthuli Ncube
Finance Minister Mthuli Ncube

The lobby group made the call in a comprehensive position paper, titled “CZI Policy Response Paper 1”, submitted to Government this week, as part of proposed policy interventions to avoid potential negative impact of the $18 billion stimulus.

CZI’s suggested policy interventions and reorientation also covers guidance on money supply, careful stimulus package calibration, modalities for funding disbursements and institutional strengthening proposals.

Government came up with the economic stimulus and recovery package to ameliorate the devastating effects of the Covid-19 global pandemic, which has killed hundreds of thousands and infected millions worldwide, forcing months of national lockdowns.

The proposals come against the backdrop of exchange rate volatility in Zimbabwe since broad economic reforms that started in October 2018, which also ushered the process of de-dollarisation.

As the market absorbed the changes, after a decade of multi-currency regime anchored by the US dollar, the local unit that was reintroduced in 2019 after a decade long hiatus, has depreciated exponentially, fuelling increases in inflation.

“The bottom line is that there is no point in providing facilities to resuscitate production when it is almost impossible to legally obtain foreign exchange through official channels.

“At the same time, the fixed exchange rate creates a significant price distortion in the economy which undermine stability.

“One of the best examples of this is that the fixed exchange rate then results in the need to provide an incentive to gold producers,” CZI said.

As such, CZI wants the fixed rate regime, adopted in March following Covid-19 outbreak, replaced by “creation of a two-tier exchange rate management system with a crawling peg combined with a market tier (system) to guarantee formal access to foreign exchange for all businesses”.

Crawling peg is an exchange rate regime that allows depreciation or appreciation to happen gradually.

In order to provide predictability and stability to the foreign currency being sold to the Reserve Bank of Zimbabwe under the surrender arrangements, CZI recommended that the current fixed exchange rate be modified slightly into a formal crawling peg.

The industrial sector representative group suggested a variable crawling peg exchange format, such as one guided by monthly inflation rate adjustable on the previous month’s rate.

“So for example if month-on-month inflation in April is 3 percent then the peg would be adjusted by 3 percent in equal daily increments,” CZi said.

Notably though, CZI suggested, this crawling peg exchange rate system would apply only to the sale of surrendered foreign exchange, which goes to the central bank for critical state obligations.

And on the second tier system, CZI has proposed full implementation of the Reuters system on a willing buyer -willing seller basis. The system was suspended in March after just about a month of little success.

The floated exchange rate system, the industrial lobby submitted, will ensure that there is a market for foreign exchange, which clears on a daily basis and where supply meets demand for forex.

“We can aim to converge these two tiers over time. The market exchange rate will be the benchmark exchange rate for all transactions including customs duty which will boost Government revenue and obviate the need for Government to collect duty in foreign currency,” CZI submitted. The Herald

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