THE acting Reserve Bank of Zimbabwe governor Charles Chikaura says the country’s foreign currency situation remains critical, against the background of declining inflows and
widening foreign currency demand.
In a written response to questions sent by businessdigest Chikaura said over the last three months, foreign exchange inflows had largely been outweighed by requirements for external payments, resulting in net outflows of foreign exchange.
“This has exacerbated foreign exchange shortages currently being experienced in the economy,” Chikaura said.
Most of these external payments are for diplomats living abroad at Zimbabwe’s 33 missions, debts for the Zimbabwe Electricity Supply Authority (Zesa), fuel supplies for the National Oil Company of Zimbabwe (Noczim), and essential drugs for the Ministry of Health and Child Welfare.
“Foreign exchange shortages, over the last five years, have largely been a result of poor export performance due to a shrinking export base, deteriorating terms of trade for primary exports and suspension of international balance of payments support, as well as drying up of external lines of credit,””Chikaura said.
“As a result, growth in exports has fallen from 13,9% in 1996 to an estimated 14,3% in 2002.”
The Minister of Finance and Economic Development Herbert Murerwa, while presenting his $672 billion Supplementary Budget in parliament last week said foreign currency shortages had resulted in inflationary pressures on the economy.
The country’s inflation stands at 399,5% for July but analysts predict it will continue soaring to bash the 500% mark by year-end, with some even suggesting that it could reach 1 000% because of the parallel market.
“Major inflationary pressures in the economy have been emanating from several factors,” Murerwa said. “Foreign exchange constraints, leading to low capacity utilisation in the productive sectors of the economy and the entrenchment of parallel market activities.”
Chikaura sad while exports and export earnings had continued to decline, demand for foreign exchange to procure critical imports such as food, fuel, electricity, drugs and imported industrial inputs, had risen sharply, resulting in crippling foreign exchange shortages.
“The sharp escalation in inflation, from 55% at the end of December 1999 to just under 400% by July this year, against levels of below 10% obtaining in most of the country’s regional and international trading partners, has severely affected export performance,” the RBZ boss said.
He said due to persistent mismatches between demand and supply of foreign exchange, a parallel market for foreign exchange had developed.
“Parallel markets for foreign exchange develop whenever demand outstrips supply, particularly if the official price does not respond accordingly,” he said.
The Ministry of Industry and International Trade, which introduced price controls on various commodities, threw out the decision after discovering that the idea was very difficult to implement. Some of these products are now being “monitored” instead of being controlled.
“Whereas in many developing countries, widespread trade restrictions and stringent foreign exchange controls have led to proliferation of parallel markets for foreign exchange, the Zimbabwean situation arose from persistent macro-economic imbalances, in particular high inflation,” Chikaura said. “Speculators have taken advantage of the resultant crippling foreign exchange shortages to continuously depreciate the exchange rate, for desperate importers in the parallel market.”
He said the long-term solution to the foreign exchange problem and the parallel market however, was for the implementation of a “consistent and comprehensive set of macroeconomic policies, aimed primarily at promoting export growth, so as to ensure that the economy realised adequate foreign exchange”.