The market should price itself

The market should price itself    

By Equity Axis

HARARE, Last week the government put in place a legislation charging any persons offering goods and service to quote both in local and foreign currency, for the products. The law follows a sustained disharmony between the local prices of goods and the comparable USD price charged at the point of sale (implied exchange rate) and the interbank exchange rate. The retail implied rate, reflected at the point of purchasing is relatively higher compared to the interbank rate, which means general retailers are pricing the local unit at a much less value than it is trading on the official auction market. Government feels the discrepancy between the retail rate and the interbank rate is speculative and prejudicial to consumers, most of whom earn salaries in local currency.

Between 2016 and 2019, which is the period of dollarization, a multi-tier pricing system prevailed in the country denoting an incongruent currency system. This was a culmination of market distortions brought about by the Central Bank’s failure to clear the foreign currency queue. As at April 2018, the Bank had a backlog of US$600 million while a few months later in September, Treasury announced that cumulative TBs outstanding were at $7.8 billion. The issuance of Treasury Bills propagated an unintended re-emergence of a local currency through the RTGS system. Further the mode of payment attracted different rate of exchange or discount then since the official currency was still the USD. Payment of goods in RTGS attracted a steep discount (higher cost) relative to USD cash settlement and Mobile money. This was due to settlement timing and the cost of conversion to mobile wallet, a generally preferred common way of transacting.

A proliferation of this system has since remained in place into the post dollarization phase. This is because the official exchange rate has largely failed to capture the true value of currency. For most of the period between February 2019 and June 2020 the official exchange rate has lagged the parallel exchange rate. Producers have however faced local costs referenced on the black market rate. This is because trading on the interbank has fluctuated and in some periods trading was completely halted. In instances when the market was up, some sessions did not register any trading activity. The RBZ, for most of the period controlled the rate and this was a deterrent to price discovery. Also most of the economy is largely informal and most of the informal market do not have access to the interbank market hence the reference to parallel market.

This piece of legislation however comes at a time some of the market dynamics have changed and these include increased flows on the interbank.  To date, over US$85 million has exchanged hands on the interbank since the 23rd of June weekly auction. A market rate has been established without RBZ hand except that it is a participant on the sell side. The average level of demand satisfied is circa 83% over the 6 week trading period, which is satisfactory. This implies that of every dollar demanded 80 cents was supplied. So one would safely conclude that a greater chunk of all the liquidity sought in the economy was supplied. It is on this premise that government has moved to institute the aforementioned legislation which assumes that most of the USD liquidity sought by importers is being matched at discretionary rates on the interbank.

Typically, this would be ideal if several factors were stable one being that the interbank rate has not yet stabilized. The Zimdollar has lost value in successive auctions since the beginning of the auction system in June. The currency has an average of 5.5% in weekly trades over the period. One cannot therefore quote a rate which would predictably have been overtaken by the time the next auction is conducted. In essence this is not prudent as a predetermined loss is deliberately overlooked. A sustained indulgence means that at the end of the month a company would have suffered losses equivalent to the variance between the quoted rates on shelves and the successive week’s rate. Over a longer duration the losses may be quite steep.

Another factor is that there has not yet been convergence between the interbank rate and the parallel market rate. This sustained gap is reflective of the huge reliance on the parallel market by the informal market which makes up 60% of the economy. Likewise it also reflects a premium on currency readily acceptable and factored in by the generality of the citizens given the background of a dysfunctional formal market in past periods. The market does not yet fully trust the system and pegging of prices in equivalence of the parallel market is to hedge one’s position.  If at all the formal market will sustainably work, it would follow that those pricing their goods at a higher local price referencing the interbank, would soon be pushed out of business by those accessing interbank cash and offering goods at lower ZWL$ prices naturally. This would over the long term realign the market without any resort to legislation.Equity Axis