LIVINGSTONE MARUFU
The Financial Intelligence Unit (FIU) is hounding struggling businesses to enforce ‘price controls’, multiple business leaders and economists have said, amid fears such a move would fuel US$ inflation.
The pursuit of companies comes at a time when the government has been battling exchange rate volatility, which resultedin prices of goods and services rocketing in the past months.
This resulted in annual inflation hitting 175.8% in the month of June from 86.5% in May. Month on month inflation rate also shot to 74.5% in June from 15.7% in May.
However, measures put in place by the government resulted in some stability in the last few weeks.
“The FIU has been harshly enforcing compliance with the prescribed principle of ‘formal exchange rate plus a 10% margin.
“The enforcement of price controls through the exchange rate by the FIU is actually also inflationary as it causes an increase in United States dollar prices at a time when the American dollar has a higher weight in the blending.
In short, the United States dollar inflation is a compliance driven inflation as formal businesses tried to hedge against an unrealistic official exchange rate which they were being forced to use,” the Confederation of Zimbabwe Industries (CZI) said in its latest report.
Economist Gift Mugano told Business Times that FIU was destroying the businesses by trying to institute price controls, which increase the United States dollar.
“The local firms peg their prices at the prevailing parallel market rate causing the Zimbabwe dollar to be on the high side as the businesses forward price to survive. If the FIU comes to enforce the indexation of the United States dollar companies would struggle,” he said.
But Finance and E c o n o m i c Development deputy minister Clemence Chiduwa said businesses should comply or perish.
“In terms of liquidity management we have an optimal balance in terms of the liquidity that is supposed to be in the market so where we see there is an appreciation or depreciation of the local currency then the Reserve Bank of Zimbabwe and Treasury will do open market operations interventions, so what is prudent for the business is to follow the official rate.
“Those who continue to index their prices using the parallel market rates will put themselves out of business as consumers have choices so the United States dollar inflation is for short term and what is critical is for business to adjust,”Chiduwa said.
He added: “The reality is that stability is going to be sustained, we are not going to let go and stability is not transitory. It’s now time for business to start to be ethical.
“They can hold on to their current position and see what is going to happen. It is going to be sustainable. They are allowed to take their position but they will lose out in US$ terms as the local currency appreciates.”
The development comes, as there is a long lag in the change of prices going down as compared to how they went up.
Economist Joseph Mverecha said the adjustment to the long run mimics the (exchange rate channel) monetary policy transmission mechanism.
“We are observing price realignment at a much slower pace than initially envisaged.
At some point, we will begin to witness price discounts in both ZWL$ and US$ as the exchange rate continues to appreciate,” Mverecha said.
CZI chief economist Cornelius Dube said the business takes a long time to adjust due to the fact that businesses stocked at a higher premium.
“We saw that the official exchange rate started appreciating the parallel market took a long lag before it followed suit later. The parallel market started falling but it reached ZWL$7000: US$1 and it stopped there but the official continued to go down. We expected that the parallel market would follow suit but it has begun to rise again,” Dube said.
“The pricing of the ZWL$ is correlated with the movement of the parallel exchange rate hence the prices will follow that pattern.”
He said the biggest challenge in terms of pricing under the current regime was the parallel market premium.
