THE Confederation of Zimbabwe Industries (CZI) has implored monetary authorities to come up with an interbank trading platform where foreign currency demand and supply would determine the exchange rate.
The Reserve Bank of Zimbabwe (RBZ) is currently running its weekly foreign currency auction system, whose rate was US$1;$130 at last Tuesday’s session, against US$1:$230 on the parallel market.
Individual firms have also been using their own exchange rates of around US$1:$200 in pricing their goods, triggering distortions that have affected business.
The auction system has failed to tame the rampaging parallel market rate, prompting captains of industry to call for a review.
“Zimbabwe is currently in a dual currency system, and the coexistence of the two currencies in the face of exchange rate distortions is causing difficulties for business operators,” CZI said in its latest macroeconomic briefing note to members.
For example, the industry body said businesses were being investigated for not adhering to provisions of Statutory Instrument 127, which require the use of an auction rate which is not market clearing.
“Suppliers and service providers index their services to the parallel market, which creates viability challenges if pricing ignores the parallel market rate.
“History has also taught us that the exchange rate cannot be legislated into a reference rate on the market, as the market will always set its own rate,” the note read in part.
“The authorities have two choices; either let the formal market determine the exchange rate using market forces or continue with controlling the formal market while letting the parallel market set the reference rate.”
The CZI said the latter option was detrimental to the economy.
“The fear that allowing the auction rate to depreciate will see the parallel market depreciate in turn appears not to be based on evidence, as the market premium has been shrinking with the depreciation of the official exchange rate,” it said.
“It is, therefore, important that modalities for having a market-determined exchange rate be explored and acted upon, especially the need for an interbank trading platform to emerge where demand and supply of foreign currency will determine the exchange rate, rather than the auction rate being used to dictate terms.”
The CZI said the parallel market was generally used to benchmark prices, hence prices will continue to increase with the increase in the parallel market rate.
It said the participation of business on the parallel market could only cease with the elimination of distortions on the official foreign currency market.
“The foreign currency market is in need of a market platform that allows the discovery of a market determined exchange rate,” it said.
While the Dutch foreign currency auction has helped as a foreign currency allocation platform, CZI said confidence in the auction rate was very low due to the huge parallel market premium.
“The economy needs a reference rate, and this rate can only be determined by market forces rather than legislation,” the industry body said.