Published by the government of Zimbabwe
Victoria Ruzvidzo and Brian Benza
22 July 2005
Harare — Reserve Bank of Zimbabwe (RBZ) Governor Dr Gideon Gono yesterday adjusted the exchange rate to $17 500 from $10 500 to the United States dollar when he presented his monetary policy review statement which was biased towards foreign currency generation and reining in inflation.
The new exchange rate will apply to non-governmental organisations, embassies, international organisations, non-resident Zimbabweans and sellers of free funds.
As part of the campaign, the central bank also announced that all exporting companies, individuals and organisations currently holding foreign exchange in their foreign currency accounts, could also liquidate their foreign exchange at the enhanced support price.
The new rate is well above the purchasing power parity rate, which should be between $14 500 and $15 000 to the US dollar.
Zimbabwean exporters have thus been rendered more competitive when compared to their regional counterparts.
Industry - as represented by the Confederation of Zimbabwe Industries, the Zimbabwe National Chamber of Commerce and the Chamber of Mines - last week made a joint proposal to the central bank for a viability exchange rate of $16 000 to the greenback.
"We propose that the foreign currency auction rate be allowed to adjust to $16 000 to the US dollar by the end of July 2005," read part of the document obtained from industry sources this week.
Exporters and other generators of foreign currency would now be expected to respond positively to the new exchange rate, the second review after the Diaspora rate was adjusted in May from $6 200 to $9 000 to the greenback.
The auction rate has averaged $10 500 in recent weeks.
As a result of the massive upward review of the exchange rate, the RBZ has decided to set aside the 5 percent borrowing facility for the export sector, with exporters' concerns now being addressed through the exchange rate.
"As monetary authorities, we are pleased to report that our consultations with industry players as well as representative bodies of exporters over the past quarter led to mutual convergence of minds on the need to rationalise the support being extended to exporters through the exchange rate," said Dr Gono.
The new figure is expected to go a long way in boosting the export sector, which has largely been clamouring for an upward review of the exchange rate to increase their viability.
Total shipments between January and July amounted to US$877 million, reflecting a 7 percent growth on the corresponding period's US$822 million.
This figure is expected to rise further for the remainder of the year given the latest exchange rate adjustments and other incentives already in place for the export sector.
Furthermore, following the new exchange rate, the $5 000 support price for tobacco farmers has also been replaced with the enhanced support exchange rate of $17 500/US$, at which tobacco growers will be paid for their deliveries to the auction floors.
The gold support price has gone up to $230 000 per gramme from $175 000 to uplift the performance of the gold sector, which raked in US$122 million in the first six months of the year.
The support price for cotton growers has been increased to $5 000 a kilogramme from $3 500 as the growers do not directly benefit from the new foreign exchange rate.
To counter effects of the drought, the 20 percent agriculture facility still stands.
In another bid to boost foreign currency inflows, the Import Tracking Control Numbers (ITCN) system has been suspended to allow for the free inflows of free funds from offshore markets.
"Holders of free funds from offshore sources are, with immediate effect, free to bring in imports, particularly those of a productive nature on a no-questions-asked basis," said Dr Gono.
Suspension of ITCN will be expected to ease demand pressures on the auction system while importation of raw materials will be easier.
In the first six months of the year, a total of 51 main auctions were conducted with fuel consuming 32 percent of the allocation followed by raw materials at 31 percent, while equipment, machinery and spares took up 15 percent.
On average, the bank processed between 6 000 and 10 000 bids per auction, with values ranging from US$150 million to US$200 million against US$12,5 million on offer.
"Cumulative demand for foreign exchange at the auction, however, is inflated by re-submissions, splitting of pro-forma invoices, use of different suppliers for same invoices, use of different variations of company names and use of subsidiary companies and middle dealers," said Dr Gono.
On the inflation front, the governor remained optimistic that the rate would fall to 80 percent by December despite growing pressures that have been reflected in annual inflation rates increases over the past three months.
He said the upward momentum was expected to continue until September before declining in the last quarter of the year.
The resurgence in inflationary pressures was largely a result of last month's 178 percent fuel price adjustment, drought-induced price shocks on the food component of the consumer price index and the cost-push effects of wage and salary pressures.
Increases in school fees, rents and rates, and high monetary expansion had also contributed to the inflation spiral.
"The unfavourable trend is, however, expected to reverse during the last quarter of the year, with annual inflation still targeted to rescind to around 80 percent by December 2005," said Dr Gono.
The recent upturn in monthly inflation - which rose to 18,1 percent in June from 13,1 percent - was not sustainable and "at variance with the collective vision of macro-economic stability.
"This requires that, as a nation, we redouble our efforts to contain and tame the inflation scourge."
Dr Gono stressed that it was critical for labour, Government, business and civil society to recommit themselves to a progressive social contract which would anchor a balanced incomes and pricing framework as part of efforts to stabilise the macro-economic environment.
As part of the central bank's efforts to reduce inflation, secured accommodation has gone up to 180 percent from 160 percent, while unsecured accommodation is now at 190 percent from 170 percent.
Dr Gono warned market players that the central bank would not tolerate any abuse of special facilities through investments on the money market, as has been the case previously.
"As monetary authorities, we are fully aware that this tight interest rate framework will tempt some market players into an arbitrage mood with the objective of abusing the targeted concessional special facilities through money market investments.
"The market is, therefore, strongly warned that rigorous follow-ups will be effected on all cases where producers benefit from the special facilities," said the governor.
On the financial sector front, the central bank will from September next year increase the minimum core capital requirements of financial institutions in line with international trends and to fortify the public's confidence in the banking sector.
Commercial banks will be required to have a $100 billion capital adequacy threshold, while merchant banks' limit has been set at $75 billion, with a similar figure set for finance houses.
The figure for building societies has been set at $75 billion, discount houses $50 billion and asset management companies at $10 billion.
A Credit Reference Bureau is also going to be established to ensure discipline among borrowers in the financial sector.
The bureau will collect information in respect of all loans and advances being generated in the banking system and provide a central database, which will, among other things, aid lenders in the evaluation of creditworthiness of borrowing clients.
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