Demand tumbles as Zim dollar runs dry

05 Aug, 2022 - 00:08 0 Views
Demand tumbles as Zim dollar runs dry Prof Mthuli Ncube

eBusiness Weekly

Business Writers

A cocktail of measures introduced by fiscal and monetary authorities with the aim of bringing exchange rate and price stability in the economy, have constrained spending with aggregate demand significantly slumping, particularly in the formal sector, Business Weekly can reveal.

Highly placed sources in Government say more measures targeting government suppliers will be rolled out soon to reinforce existing ones.

Two weeks ago, Finance and Economic Development Minister Mthuli Ncube, revealed that Government had launched an investigation to unearth illicit dealings by government contractors that were overcharging for goods and services.

Mthuli revealed that some suppliers who supply goods and services to Government institutions are channeling the funds they receive to the illegal foreign exchange.

Sources, however, say Government has since started revalidating contracts signed by parastatals to see if Government was not prejudiced.

Government is also expected to stop making advance or cash payments to suppliers and in the process, limiting the supply of local dollars in the market.

“One of the measures that might be introduced is for the Government to stop buying from suppliers that do not use the official exchange rate in pricing,” the source revealed.

This comes as the Government is the biggest spender in the market where billions paid to suppliers, on inflated prices, end up fueling exchange rate depreciation on the parallel market.

Business executives who spoke to Business Weekly, but requested anonymity, confirmed the fall in aggregate demand saying in some cases demand has fallen by as much as 40 percent.

Some of the measures introduced by government include, banning third party foreign payments to ease pressure on demand for foreign currency.

The RBZ said; “In line with the Ultimate Beneficial Ownership (UBO) principle, authorised dealers shall not process third party country foreign payments.

“Accordingly, foreign payments shall only be made to the country from which the goods/services being invoiced are being imported.”

Further, the central bank suspended lending for close to two weeks. In a bid to curb increase in Broad Money growth (M3), authorities suspended lending temporarily for about two weeks. There was a huge outcry from the market and the ban was subsequently lifted. While the ban was lifted, stringent measures were put in place to monitor borrowers.

The central bank also turned hawkish and sought to move away from negative real interest rates to positive one. This was done through increasing the Bank policy rate from 80 percent to 200 percent per annum.

Zimbabwe had not had a real interest rate for some time due to high inflation, but for the first time in many years there was a real interest rate at least for a month. The increase in interest rates seem to have deterred speculative borrowing, which authorities have been pinpointing as the cause of the inflation surge.

Lastly, the apex bank introduced gold coins meant to be an alternative store of value for those with excess cash. To preserve value, the public and companies were converting their ZWL into USD, which put pressure on the parallel market and Zimbabwe dollar depreciated further.

But following their introduction, gold coins and other measures seem to be succeeding as the exchange rate has fairly remained stable.

However, the measures seem to have had an adverse effect on demand from formal businesses as they are now struggling to make sales in both the local and foreign currency.

Economic analyst, Farai Mutambanengwe, confirmed the increased demand for the local currency saying one of the factors leading to demand for the Zimbabwe dollar has come from businesses that are over-borrowed as they wanted the money to clear loans following the recent 200 percent interest rate increase by the Reserve Bank of Zimbabwe.

He said the appreciation of the local currency was somewhat intermittent.

An executive with a leading packaging firm raised alarm, saying customers were struggling to pay for supplies in the local currency and were now requesting to be billed in foreign currency instead.

Paying in foreign currency is, however, problematic in formal businesses as prices, at the official exchange rate, are deemed too expensive.

Following the gazetting of Statutory Instrument 118A of 2022, formal manufacturers and retailers effected an upward adjustment in their foreign currency prices as a way of cushioning against loss of value, if customers choose to pay in local currency.

Under SI 118A of 2022, a natural or legal person shall be guilty of a civil infringement if he or she, being a seller of goods or services, offers such goods or services at an exchange rate above ten per centum the prevailing interbank rate published by the Reserve Bank of Zimbabwe.

But with the Zimbabwe dollar now seemingly in short supply, customers are finding products in formal businesses expensive in foreign currency terms.

The result has been a significant drop in demand estimated by one executive to be between 30 and 40 percent.

Falling demand, according to market watchers, has the potential to collapse the little left of the formal economy and also implode the overall economy as a whole. Volumes have retreated significantly, said another executive with a leading wholesaler.

“If you go into formal retail and wholesale outlets, you will see that it’s quieter than usual. That’s a sign of falling aggregate demand,” he said but requested not to be named.

“I don’t want my suppliers to panic and start demanding cash up front, but the truth is products are not moving from the shelves as normal.”

Confederation of Zimbabwe Retailers president, Denford Mutashu, confirmed that consumer demand is depressed.

“So far, prices of basics such as cooking oil, sugar and salt have come down but consumer demand is depressed. On other products such as the furniture side, we continue to see unrealistic prices, and consumers have no capacity to support such prices. We expect to see rentals for urbanites falling and the economy has got to go back to normalcy,” he said.

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