The initial impact on headline inflation has been most pronounced, with month-on-month inflation decelerating from above 30% in June/July to an average of 2.2% for the months March through to June 2021.
On current trends, headline inflation was on course to decline further to 55% by July and 30% by December 2021.
The policy scenario of sustained inflation decline is achievable. This would be buttressed by a strong fiscal policy stance and tighter monetary policy.
Industry has been ramping up production since the relaxation of lockdowns, with very real prospects of positive growth being achieved by year-end. Agriculture has had significant growth across key subsectors, following the good rains. Employment figures have been rising on the back of a stable environment since June 2020.
The forex auction system was put in place as a price discovery mechanism and to avail foreign currency on the formal market. In its active price discovery, the Auction system quickly started to close the gap between the auction rate and the parallel market rate without driving up the parallel rate.
However, when supply and demand became somewhat distorted at the auction when all demand was allocated but settlements significantly delayed, this signalled that the auction had now lagged behind in price discovery and was now operating at an almost fixed rate that it could not clear, the parallel market rate picked up.
It is important for the auction to stay the course of price discovery and eliminate the margins that are an effective tax on exporters who surrender part of their earnings to the auction as this would also encourage forex generators to come to the auction and improve its liquidity.
As CZI, we feel strongly that we are very close to achieving overall macroeconomic stability, necessary to power sustained recovery and growth. Both market and policy deficiencies can be addressed without jeopardising that trajectory with a heavy-handed SI which will likely reverse the gains of the past year.
We understand and appreciate Government concerns for stability and the frustration with some aberrations by a few corporate entities which access FX at the Auction rate and yet price at the alternative market rates. This is not representative of the entire industry, and we believe engagement between industry and Authorities can resolve such aberrations.
The industry body does not support such behaviour in any way, but we also believe it does not warrant the blanket SI which has far reaching adverse implications for the economy.
Pursuant to the foregoing, CZI therefore calls for urgent dialogue with Ministry of Finance and monetary authorities to map out a way forward.
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