Zimbabwe cannot go the Zambia way to stabilise its currency because their situations are different

Q &A:

HON. SEN. MUZENDA:  My question goes to the Minister of Finance.  I want to find out from the Minister what the challenges are if we were to let the US dollar be determined by market forces because at the moment, we have the auction rate; willing buyer-willing seller rate and the parallel rate.  This also brings challenges when people are buying because we have different prices for swiping, using ecocash and also if using cash.  I thank you.

THE MINISTER OF FINANCE AND ECONOMIC DEVELOPMENT (HON. PROF. M. NCUBE):  I thank Hon. Sen. Muzenda for that very important question.  The exchange rate is being determined by market forces.  When we established the auction, we were easily selling US$50 million but now we have come down to average US$25 million.  In fact, two days ago, we only sold US$7 million because the demand was quite low.  That exchange rate was arising from a Dutch Auction System, which means that you could go there and demand whatever exchange rate you wanted.  So that is ultimate freedom and choice.  However, we realised that perhaps even that expression of freedom and choice of your exchange rate, the price discovery process was still not good enough.  So we decided to go ahead and introduce the willing buyer, willing seller hoping for better price discovery.  We did notice that the exchange rate from the willing buyer- willing seller window is higher than the auction window.  As of Tuesday this week, we noticed that even the auction rate rose and we are noticing that they are approaching and converging.  So, we do believe in a market determinant exchange rate and we have taken certain actions to get to that market exchange rate.

There is no difficulty in having a market exchange rate because already if someone believes that the parallel rate is the market exchange rate, that is already what is determining prices in the shops and that is the challenge. It is no longer an issue in that sense but we are also noticing something that the parallel rate is not what we call a spot rate but actually it is reflecting the future called forward pricing. Someone is thinking that if I am going to replace this gadget in a month’s time prices would have moved and therefore I need to charge in such a way that I reflect the exchange rate in that one month’s time. So, it is reflecting the future.

When you think that the parallel rate is the market rate now, actually it is a market rate for the future, which means we also need to fine-tune some of our policies to deal with the notion of a forward rate rather than a spot rate. One of the reasons why the gap between the official rate, whether it is willing buyer willing seller auction rate and the parallel rate continues to be there, is because there is always a gap between a spot rate and a forward rate. It is always there in all the markets in the world.

Sometimes we have to accept that maybe the gap will never be closed but we want it to be narrow. Perhaps we should not think that by somehow changing the system so dramatically, those two systems will merge. They might not and those are some of the things that we are noticing which will need further fine-tuning of the auction system and our forex determination system. I thank you.

HON. SEN. CHIEF NGEZI: I heard the response by the Hon. Minister of Finance regarding the issue of parallel and official rate but the truth is that our people live with the parallel rate not the bank rate or Dutch system. Their livelihood depends on the parallel rate and my question is; why is it that those retailers who sell goods using the parallel market rate which is illegal are not sentenced or fined and are allowed to determine their own prices because what they are doing is the same thing with the street guy selling money because the effect is the same?

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