We waited rather impatiently for new measures to be announced by the government arms as the last round of measures had failed to tame the twin problems of exchange rate depreciation and inflation and instead fueled the two to new highs for the year. The Minister presented a press conference as he addressed the fundamental issue of currency and exchange rate regime while touching on matters to do with fuel, maize, wheat and civil service salaries. Here we look at all but the civil service salaries which will be addressed in a follow-up article.
Multicurrency system to be brought into law
The Minister tackled the currency issue head-on but perhaps not with the tackle that people expected. The Multicurrency (dual-currency really) system will be brought into law until the end of National Development Strategy part 1 (NDS1) which runs until 2025. The noble effort is meant to give legal basis denomination of asset, contract and pricing values in US dollars. The loss of value in 2018 and 2019 was experienced as the nation firstly accepted that US dollars and bond notes were not equal in value and then changed recognising the Zimbabwean dollar (bond note or RTGS dollar as a unit of account for the nation is still fresh in the minds of many and threatens businesses and individuals alike. This move will hopefully give validity and security to agreements denominated in US dollars or other foreign currencies.
Interbank rate supreme but what about the auction?
In less surprising news the Interbank (willing buyer willing seller) rate was declared as the exchange for pricing conversions in both directions. So whether you price in Zimbabwean dollars and convert to foreign currency or vice-versa you will be required by law to use the interbank rate as your pricing rate. Where does this leave the auction rate in the pecking order? When the interbank rate was launched the good Reserve Bank Governor mentioned that the intent was to eventually merge the two rates. The assumption was that the auction rate grossly overvalued the Zimbabwean dollar and so the only way this would work was with the auction-rate playing catch up to the interbank rate. Some headway has been made in that regard and we could be seeing the final breaths of the auction rate.
Fuel levy down
The Minister took time to reiterate the government’s stance on fuel which ZERA went to great lengths to make clear in its price announcement update. The government reduced fuel levies, down to zero cents on diesel and 4.7 cents on petrol to keep the price of fuel below the incomprehensible 2 US dollars per litre mark. According to the minister the government also released an undisclosed amount of fuel from the strategic fuel reserve to keep supplies adequate.
Maize and wheat supplies
The Minister also announced a raft of actions the government is taking to steady supplies of wheat and maize to address the prices of bread and mealie-meal. 21 000 tonnes of wheat are to be released to millers at the import parity price translated to Zimbabwean dollars at the interbank rate. In simple language, the government will sell the wheat it has to millers at the same price it would cost to import it but will convert the price to Zimbabwean dollars at the interbank (willing buyer willing seller rate). A further 70 000 tonnes will be imported and sold to millers at the import parity price also converted at the interbank rate. This amounts to a subsidy on wheat prices for millers.
The minister further announced 7 000 tonnes of maize will be released to millers as it was already paid for. A further 25 000 tonnes will be released to millers while 27 000 tonnes will be sold to millers from the strategic grain reserve at a price of ZWL$80 000 plus US$90 per tonne. You can have fun calculating an effective price but we are looking at another price subsidy on grain.
Is this good?
We should applaud the taking of a stance on the multicurrency system even if it may not be the stance many have hoped for. The only way we can move forward is by establishing in concrete where we stand. Making the interbank rate the defacto reference rate was already done when it was introduced but as with the multicurrency issue, it’s always good to have such matters firmly in place. The Ministry seems to have burnt the midnight oil and published Statutory Instrument 118A of 2022 to bring the multicurrency system and interbank rate pricing into law The other measures are lukewarm and nothing we haven’t seen before. We all have an idea of how subsidies have turned out in the past.