INDUSTRY POLICY RESPONSE

TO SI 127
31 MAY 2021
STATUTORY INSTRUMENT 127 OF 2021

EXECUTIVE SUMMARY
CZI believes that SI 127 should be immediately suspended.

CZI agrees with the issues that the MOF is trying to resolve:

• Control inflation.
• Eradicate the use of the black and informal markets.
• Bring stability/ sanity to the foreign currency markets.
• Prevent abuse of the foreign currency obtained on the auction for profiteering and other opaque
activity.

It is our submission that the SI127 does the exact opposite of the above and indeed will:

• Reduce the amount of foreign currency in the official and formal channels.
• Create USD inflation to achieve a perceived required return by business.
• Bring businesses that previously were able to generate forex into the auctions. These organizations
were able to collect foreign currency from sales previously.
• The market believes that the auction is a controlled rate and therefore from the past we have seen
that it looks for another reference point to determine a price. That will mean we are back to the
dark days when the black-market rate anchors pricing. This market has thin volumes and is driven
by rumors and speculation.
• Reduce foreign currency revenues by government as currency will be driven underground.
• Farmers will be negatively impacted as we expect the parallel rate to take over and crash the
market. GMB for example has fixed a price for purchase of grain. This price will not reward farmers
for their efforts.

Business is mostly interested in long term survival and therefore will take positions that may lead to
a defensive posture. Trading takes a back seat to balance sheet integrity should the black-market rate
start to devalue the ZWL. This leads to further inflation as fewer goods come to the market.

PROBLEM STATEMENT
We believe that the problem is the fact that our journey on currency reforms has not been completed
and is at the center of this conversation. Price discovery was in the black-markets and should come in
the formal sector. We believe that the Dutch Auction principles should be implemented and that the
auction resolves price discovery matters as it was intended.

We do not believe the rate will run as we saw last year budget surpluses and money supply restrictions
work. We proffer that M3 is more important in the long run than M0 which is tactical.

1
THE TABLE BELOW SHOWS POLICY INFLATION SCENARIO:

  CPI MOM YOY%

Nov-20 3766.78 0.032 399.61%
Dec-20 3941.78 0.046 348.58%
Jan-21 4155.90 0.054 362.30%
CURRENT POLICY SCENARIO
Feb-21 4299.41AND ITS IMPACT
0.035 321.67%
Over theMar-21 4396.60
past nearly12 months since 0.023Currency Auction, the
the launch of the Foreign 240.63%
economy has
witnessed much progress, notably4481.49
Apr-21 due to the stability engendered
0.019and occasioned by the Dutch Foreign
196.25%
ExchangeMay-21
Auction system. As a result of the Auction system, 0.025
4593.71 exchange rate predictability,
163.76%and growing
access of foreign currency through the formal system, the formal positive outcomes were realised:
Jun-21 4704.13 0.024 105.15%
• Jul-21
Collapse 4817.20
in adverse expectations. 0.024 55.02%
• Aug-21of the Alternative 4932.99
Narrowing exchange rate premium. 0.024 46.39%
• Sep-21
Falling month on month inflation5033.49 0.020in November 2020).43.86%
(from 35.5% in July to 3.2%
• Oct-21
Increase in local industry capacity utilization.
5136.04 0.020 40.65%
• Increase in
Nov-21 locally manufactured goods.
5240.68 0.020 39.13%
• Increase in USD deposits in the
Dec-21 banks.
5347.45 0.020 33.66%
• Fiscal revenues growth.
Mar-22 5680.98 0.020 29.21%
• Steady Recovery
Apr-22 in domestic demand.
5767.35 0.015 28.69%
• Business Volumes growth.
May-22 5855.04 0.015 27.46%
• Exports growth.
Jun-22 5944.06 0.015 26.36%
The above Jul-22 6034.43
is a summary of the multiple 0.015arising from a stable25.27%
benefits for the economy and predictable
exchangeAug-22
rate and Foreign currency6126.18
management system. A0.015 stable and predictable 24.19%
macroeconomic
environment
Sep-22 inherently promotes6200.01
business growth, capacity0.012utilization, employment, exports and
23.18%
facilitates formalization of the economy. This has mutually beneficial gains for both State (fiscal
Dec-22 6426.89 0.012 20.19%
revenues, youth and gender mainstreaming, financial inclusion, among others) and industry (capacity
Dec-23 6911.28
and business growth). We see the increase in the dollar deposits is a success attributable9.52%
  to government
efforts. We do not view this as a problem as we have heard it positioned. We recommend applying
ourselves
Under the to intermediation
Policy instruments
scenario and subject to so we can
policy take advantage
refinements to improveof our victories.
the FX Auction system, widen
access and narrow down the premium, the Policy scenario of sustained inflation decline is achievable.
FOREIGN
This would be EXCHANGE AUCTION
buttressed by strong POLICY
fiscal policy IMPACT
stance and ON INFLATION
tighter monetary policy.
Thealready
As initial impact on headline
highlighted, inflation has
the economy has been most apronounced,
recorded significant with month-on-month
rebound inflation
in the current year,
decelerating from
characterised by: above 30% in June/July to an average of 2.2% for the months March through to June
2021.
• RBZ has been keeping a tight leash on money supply growth;
On current trends, headline inflation was on course to decline further to 55% by July and 30% by
December
• Treasury 2021. Such running
has been significant progress
a budget would have laid a strong foundation for further inflation
surplus;
deceleration to levels well below 20% by December 2022 under the Policy scenario and further
• Consequently,
towards single digitannual
levels headline
by 2023. inflation has been on a down ward trend from 834.1% in July 2020
to 161% in May 2021. This is significant and material progress. Month on month inflation has
decelerated sharply.

• 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 use of multicurrency in the economy allowed for spending of diaspora remittances and
company retentions on local products thereby boosting demand and reducing imports ultimately
impacting positively on the country’s balance of payment position.

2
THE TABLE BELOW SHOWS POLICY INFLATION SCENARIO:

   CPI
CPI MOM
MOM YOY%
YOY%
Nov-20
Nov-20 3766.78
3766.78 0.032
0.032 399.61%
399.61%
Dec-20
Dec-20 3941.78
3941.78 0.046
0.046 348.58%
348.58%
Jan-21
Jan-21 4155.90
4155.90 0.054
0.054 362.30%
362.30%
Feb-21
Feb-21 4299.41
4299.41 0.035
0.035 321.67%
321.67%
Mar-21
Mar-21 4396.60
4396.60 0.023
0.023 240.63%
240.63%
Apr-21
Apr-21 4481.49
4481.49 0.019
0.019 196.25%
196.25%
May-21
May-21 4593.71
4593.71 0.025
0.025 163.76%
163.76%
Jun-21
Jun-21 4704.13
4704.13 0.024
0.024 105.15%
105.15%
Jul-21
Jul-21 4817.20
4817.20 0.024
0.024 55.02%
55.02%
Aug-21
Aug-21 4932.99
4932.99 0.024
0.024 46.39%
46.39%
Sep-21
Sep-21 5033.49
5033.49 0.020
0.020 43.86%
43.86%
Oct-21
Oct-21 5136.04
5136.04 0.020
0.020 40.65%
40.65%
Nov-21
Nov-21 5240.68
5240.68 0.020
0.020 39.13%
39.13%
Dec-21
Dec-21 5347.45
5347.45 0.020
0.020 33.66%
33.66%
Mar-22
Mar-22 5680.98
5680.98 0.020
0.020 29.21%
29.21%
Apr-22
Apr-22 5767.35
5767.35 0.015
0.015 28.69%
28.69%
May-22
May-22 5855.04
5855.04 0.015
0.015 27.46%
27.46%
Jun-22
Jun-22 5944.06
5944.06 0.015
0.015 26.36%
26.36%
Jul-22
Jul-22 6034.43
6034.43 0.015
0.015 25.27%
25.27%
Aug-22
Aug-22 6126.18
6126.18 0.015
0.015 24.19%
24.19%
Sep-22
Sep-22 6200.01
6200.01 0.012
0.012 23.18%
23.18%
Dec-22
Dec-22 6426.89
6426.89 0.012
0.012 20.19%
20.19%
Dec-23
Dec-23 6911.28
6911.28    9.52%
9.52%

Under
Under the
the Policy
Policy scenario
scenario and
and subject
subject to
to policy
policy refinements
refinements toto improve
improve the
the FX
FX Auction
Auction system,
system, widen
widen
access
access and
and narrow
narrow down
down the
the premium,
premium, thethe Policy
Policy scenario
scenario of
of sustained
sustained inflation
inflation decline
decline is
is achievable.
achievable.
This
This would
would be
be buttressed
buttressed by
by strong
strong fiscal
fiscal policy
policy stance
stance and
and tighter
tighter monetary
monetary policy.
policy.

As
As already
already highlighted,
highlighted, the
the economy
economy has
has recorded
recorded aa significant
significant rebound
rebound in
in the
the current
current year,
year,
characterised
characterised by:
by:
• RBZ
• RBZ has
has been
been keeping
keeping aa tight
tight leash
leash on
on money
money supply
supply growth;
growth.
• Treasury
• Treasury has
has been
been running
running aa budget
budget surplus;
surplus.
• Consequently, annual headline inflation has been on a downward trend from 834.1% in July 2020
• Consequently,
to 161% in May annual
2021.headline
This is inflation hasand
significant been on a down
material ward trend
progress. Monthfrom 834.1%inflation
on month in July 2020
has
to 161% in May 2021.
decelerated sharply. This is significant and material progress. Month on month inflation has
decelerated sharply.
• Industry has been ramping up production since the relaxation of lockdowns, with very real
prospectshas
• Industry of growth being achieved
been ramping by year end.
up production since the relaxation of lockdowns, with very real
prospects of positive growth being achieved
• Agriculture has had significant growth across keyby year end.
subsectors, following the good rains.
•
• Agriculture
Employment has had significant
figures have beengrowth across
rising on key subsectors,
the back following the since
of a stable environment good June
rains;2020.

•
• Employment
The use of multicurrency
figures have been
in the
rising
economy
on the back
allowed
of a for
stable
spending
environment
of diaspora
since June
remittances
2020; and
company retentions on local products thereby boosting demand and reducing imports ultimately
• The
impacting
use ofpositively
multicurrency
on theincountry’s
the economy
balanceallowed
of payment
for spending
position. of diaspora remittances and
company retentions on local products thereby boosting demand and reducing imports ultimately
impacting positively on the country’s balance of payment position.

3
THE TABLE BELOW SHOWS POLICY INFLATION SCENARIO:
RISKS TO THE CURRENT POLICY SCENARIO
  CPI MOM YOY%
The FX Auction system was put in place as a price discovery mechanism and to avail foreign currency
Nov-20 3766.78 0.032 399.61%
on the formal market. In its active price discovery, the Auction system quickly started to close the gap
betweenDec-20
the auction rate and the3941.78
parallel market rate without 0.046
driving up the parallel 348.58%
rate. However,
when supply and
Jan-21 demand became somewhat
4155.90 distorted at the auction
0.054 when all demand was allocated
362.30%
but settlements
Feb-21 significantly delayed, this
4299.41 signaled that the auction
0.035 had now lagged 321.67% in price
behind
discovery and was now operating at an almost fixed rate that it could not clear, the parallel market
Mar-21 4396.60 0.023 240.63%
rate picked up. It is important for the auction to stay the course of price discovery and eliminate the
margins Apr-21 4481.49
that are an effective tax on exporters who surrender 0.019
part of their earnings 196.25%
to the auction as
this would also
May-21 encourage forex generators
4593.71 to come to the auction
0.025 and improve its liquidity.
163.76%
Jun-21
As CZI, we 4704.13
feel strongly that we are 0.024 macroeconomic stability,
very close to achieving overall 105.15% necessary
to powerJul-21 4817.20Both market and policy
sustained recovery and growth. 0.024 55.02% without
deficiencies can be addressed
jeopardising that trajectory with a4932.99
Aug-21 heavy-handed SI which will likely reverse the gains46.39%
0.024 of the past year.
Sep-21 and appreciate Government
We understand 5033.49 concerns for 0.020 43.86%
stability and the frustration with some
aberrations by
Oct-21 a few corporate entities
5136.04 which access FX at the
0.020 Auction rate and 40.65% at the
yet price
alternative market
Nov-21 rates. This is not representative
5240.68 of the entire industry,
0.020 and we believe engagement
39.13%
between industry and Authorities can resolve such aberrations. The industry body does not support
Dec-21in any way, but we
such behaviour 5347.45
also believe, it does not warranty the blanket 33.66%
0.020 SI which has far
reachingMar-22 5680.98
adverse implications for the economy. 0.020 29.21%
Apr-22 5767.35 0.015 28.69%
Pursuant to the foregoing, CZI therefore calls for urgent dialogue with MoF and Monetary Authorities
to map aMay-22
way forward. 5855.04 0.015 27.46%
Jun-22 5944.06 0.015 26.36%
Whilst the overall trajectory has been upward, the period has not been without its challenges, among
Jul-22 6034.43 0.015 25.27%
them:
Aug-22 6126.18 0.015 24.19%
• Delays in settlement on the Auction Allotments for extended periods, have been affecting
Sep-22 working capital. 6200.01
companies’ 0.012 due to the delays
Companies have been struggling 23.18%
and this has
slowed their
Dec-22 recovery. 6426.89 0.012 20.19%
• The Dec-23
increasing premium between6911.28
the official exchange rate  and the parallel market
9.52%
rate is a cause
for concern. The risk is that the economy can readily slide back into hyperinflation as a result of
the widening parallel market premium, which has re-ignited a build-up in inflation expectations.
Under the Policy scenario and subject to policy refinements to improve the FX Auction system, widen
• The dislocative effects of a widening premium could favor imports while discouraging local
access and narrow
production fordown the premium, the Policy scenario of sustained inflation decline is achievable.
exports.
This would be buttressed by strong fiscal policy stance and tighter monetary policy.
1. already
As highlighted,
IMPACT
the ASSESSMENT FOR aSIsignificant
economy has recorded 127 OF rebound
2021 in the current year,
characterised by:
1.1
• RBZ has been GOVERNMENT PERSPECTIVE
keeping a tight leash on money supply growth;
Industry
• has has
Treasury beenbeen
supportive
running of efforts surplus;
a budget by Government and the RBZ to reign in the problems that
have bedeviled the economy since the introduction of the ZWL. We are also aware of the concerns of
• Consequently,
Government, whichannual headline
include inflation has been on a down ward trend from 834.1% in July 2020
inter alia:
to 161% in May 2021. This is significant and material progress. Month on month inflation has
• decelerated
Abuse of funds accessed on the Auction.
sharply.
• Pricing of goods and services at parallel market rates, including by companies benefiting from the
• Industry
Auction. has been ramping up production since the relaxation of lockdowns, with very real
prospects of positive growth being achieved by year end.
• Increasing dollarization against a policy thrust towards de-dollarisation.
• Agriculture has had significant growth across key subsectors, following the good rains;
• Mis-invoicing practices perpetrated by some businesses.
• Employment figures have been rising on the back of a stable environment since June 2020;
• Prevalent use of rates other than the ruling exchange rate, including predatory rates meant to
completely
• The use of discourage use in
multicurrency of the
the local currency
economy by customers.
allowed In a of
for spending fewdiaspora
instancesremittances
some suppliers
and
outright refuse payment in local currency.
company retentions on local products thereby boosting demand and reducing imports ultimately
impacting positively on the country’s balance of payment position.

4
THE TABLE BELOW SHOWS POLICY INFLATION SCENARIO:

  CPI MOM YOY%

2. UNINTENDED CONSEQUENCES BUSINESS FORESEE ARISING
Nov-20 3766.78 0.032 399.61%
FROM
Dec-20
SI 127 OF 2021
3941.78 0.046 348.58%
While theJan-21
intentions of government in promulgating the SI are
4155.90 noble and appreciated,
0.054 there are some
362.30%
unintended consequences
Feb-21 that we see
4299.41resulting from the application
0.035 of the SI. These include the
321.67%
following:
Mar-21 4396.60 0.023 240.63%
• The Apr-21
immediate impact of applying the
4481.49 SI would be that US dollar
0.019 prices will be hiked so as to result
196.25%
in the same ZWL price prevailing prior to the SI. This means an immediate spike in USD inflation, a
May-21of our blended inflation
component 4593.71rate. 0.025 163.76%
• Jun-21have been relying4704.13
Companies 0.024
on local US dollar sales to generate the bulk of105.15%
foreign currency
usedJul-21
to sustain operations. Use of the Auction rate would
4817.20 result in consumers converting
0.024 55.02% their US
dollars to ZWL on the parallel market prior to purchasing, a practice already rampant outside the
Aug-21
major 4932.99
retail chains such as Pick 0.024This will deprive companies
n Pay, OK and Bon Marche. 46.39% of what
has Sep-21
become their main source5033.49
of foreign currency. 0.020 43.86%
• Oct-21
Demand for foreign currency 5136.04 0.020 significantly as this
on the Auction is going to increase 40.65%
becomes the
onlyNov-21
source of foreign currency in
5240.68the absence of domestic sales
0.020 in US dollars. There
39.13%is not likely
to be a corresponding supply side increase in the amount of US dollars coming onto the Auction,
Dec-21
which will either result in an 5347.45 0.020
increase in the delays on disbursements, or a sharp33.66%
increase in the
rate.Mar-22
5680.98 0.020 29.21%
• To date, our
Apr-22 members still have their
5767.35 allocations on the Auction
0.015 pro-rated, thus a surge in demand
28.69%
on the Auction is likely to exacerbate this problem and cause a slowdown in the economic recovery
andMay-22
job creation witnessed to5855.04
date. 0.015 27.46%
Jun-22 5944.06 0.015 26.36%
• Goods such as fuel are priced in USD and companies cannot bid for local payments at the auction.
Jul-22
Inability 6034.43
to sell in US dollars locally will thus cause supply0.015 25.27%
chain issues unless service stations are
alsoAug-22
compelled to sell fuel in ZWL at
6126.18 the prevailing Auction rate.
0.015 Such a pronouncement
24.19% however
has led to fuel shortages in the past and thus is undesirable.
•
Sep-22 6200.01 0.012 23.18%
Dec-22 6426.89 0.012 20.19%
Dec-23 6911.28   9.52%

Under the Policy scenario and subject to policy refinements to improve the FX Auction system, widen
access and narrow down the premium, the Policy scenario of sustained inflation decline is achievable.
This would be buttressed by strong fiscal policy stance and tighter monetary policy.

As already highlighted, the economy has recorded a significant rebound in the current year,
characterised by:

• RBZ has been keeping a tight leash on money supply growth;

• Treasury has been running a budget surplus;

• Consequently, annual headline inflation has been on a down ward trend from 834.1% in July 2020
to 161% in May 2021. This is significant and material progress. Month on month inflation has
decelerated sharply.

• 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 use of multicurrency in the economy allowed for spending of diaspora remittances and
company retentions on local products thereby boosting demand and reducing imports ultimately
impacting positively on the country’s balance of payment position.

5
RECOMMENDATIONS & WAY FORWARD
CZI recommends that implementation of the SI be suspended, and urgent stakeholder consultations
be held between government and business to come up with a way forward that will not jeopardise the
rebound witnessed in the economy to date. Some of the issues we believe government needs to take
into consideration are:
• Confidence is at the centre of all fiat currencies, and it is important to avoid policy misperceptions
that may result from well-intentioned Statutory Instruments.
• The path to de-dollarisation must be more clearly defined and will need stakeholder buy in along
the way for confidence.
• It is important to address deficiencies observed on the Auction, which include delayed settlements
arising from more currency being sold than is available. There needs to be confidence in the
auction or a formal foreign currency market before driving towards a mono currency. We have
already witnessed the unintended consequences of a premature push towards a mono currency
in the past two years.
• It is important that we move to a single exchange rate at which the entire economy operates,
as the presence of multiple exchange rates in the economy encourages arbitrage between the
different markets/platforms. Further engagements are necessary to make this a reality, whether
through greater efficiency on the Auction or through the interbank/bureau markets or some other
appropriate mechanism.
• A policy position has to be taken for the efficiency of the auction market where all foreign currency
accruing to government through export surrender, local Forex earnings surrender, Taxes, Duties
and any other fees received in foreign currency should be put in one pot as a correct supply
position for Price Discovery/determination at the auction. This would improve the efficiency of
the market in Price determination.