HARARE - The Reserve Bank of Zimbabwe has removed the 1:1 exchange rate with regards fuel procurement in order to stem arbitrage opportunities and loopholes which were helping to sustain the parallel market. According to a statement from the RBZ, with effect from today (May 21, 2019), the procurement of fuel by Oil Marketing Companies shall be done through the interbank foreign exchange market. This means that from now, there shall be only one foreign exchange rate to be used in the market for the importation of all goods and services. The FOB price on fuel is at US63.82c for diesel and US61.59c for petrol. The remainder is mostly made up of duties and levies. The country has experienced fuel challenges since the third quarter of last year as the Reserve Bank of Zimbabwe has been struggling to raise foreign currency for payments at 1:1.
Implications: In order to balance socio-economic factors, there will most likely be minimal change or a gradual upward change to the fuel price as Government will need to reduce its duty, which is currently sitting at $2.11/l for diesel and $2.482/l. This will impact on the fiscal performance, which had been in surplus since the increase was made in January, this year. But already overall performance of the budget would have been affected by the exchange rate losses which the RBZ was incurring. If the status quo on duty remains the same, and fuel goes up, then there will be a continued generalised price increase for goods and services in the country and an increase in inflation, with the attendant hardships which will filter through to the commuting workforce. For companies, the move is most likely to have a “double whammy” effect as it raises the costs for all companies, and slows down growth because it takes spending power away from consumers. Both of those factors work together to reduce profitability. Government had previously said that the fuel price issue is under review to reflect current market conditions. It also said that government was still studying all elements that feed into the fuel pricing structure amid indications that the blending ratio will also be reviewed upwards as Green Fuel, the sole supplier has indicated that it has enough stocks. The current blending ratio is at 10%. https://businesstimes.co.zw/govt-in-fix-over-fuel-subsidy/
Willing-buyer, willing seller principle to be effectively applied The interbank rate closed the day at 3.4832 to the US dollar, this is against the parallel market rate of between 5.3-5.5. However the RBZ says that it has now directed banks to effectively apply the willing-buyer willing seller principle to ensure that the interbank is reflective of market conditions. "Accordingly banks must ensure that there are no moral hazards in the operation of the interbank foreign exchange market. In this regard, all the foreign exchange requirements for banks for their own use that includes dividend payments, subscription fees, etc would need prior Exchange Control approval for the proper conduct of the interbank foreign exchange market." The RBZ said banks should also discontinue twinning arrangements for their customers as this undermines the efficient operation of the market.
Speaking to FinX, Governor John Mangudya said the changes were a move in the right direction as it allowed those with foreign currency to get fair value of their money. As the biggest willing seller (with a $500m facility), Mangudya said drawdowns will begin in order to underpin the interbank forex market. A recent proposal by a working group made up of comprising of the RBZ, Office of the President and Cabinet, Ministry of Industry and Commerce, Ministry of Finance and Economic Development, Confederation of Zimbabwe Industries suggested the use of the weighted average as a starting point on the interbank rate. This rate will ensure that significant amounts of foreign currency are traded through the interbank market on the basis failure to make this interbank market function freely is increasing the risk of the economy re-dollarizing. It was also agreed that the RBZ should desist from imposing administrative controls on the operation of the interbank market and should allow the exchange rate to be determined freely by market forces. Once the exchange rate is determined by market forces, this rate should be adopted and applicable to all businesses. The Interbank fx market rate is expected to start gradually increasing past the 4x mark by the end of the week. This article is courtesy of Financial Express