The widening gap between parallel and official market rates fuelled by increased use of the US dollar is likely to seriously dampen the country’s economic performance in the second half of 2021, a local research firm has said.
In its research paper titled 2nd Half Investment Space, FBC Securities said outlook of the second half of 2021 was projected to remain positive but warned that the widening gap between the official rate and the parallel market rate could have repercussions on the performance of the economy.
“Possible threats going into second half of 2021 are widening parallel market premium (more than 60%), wage pressures (both public and private sector), cost push Inflation — re-pricing of goods and services and cash dollarisation — economic agents resorting to use of US dollar cash, which in most cases remains informal, resurgence of Inflation in both US dollar and local currency,”
FBC securities said.
After an estimated contraction of 3,3% in 2020, the global economy is projected to grow by 6% in 2021, moderating to 4,4% in 2022 according to the International Monetary Fund.
A globally sustainable vaccination programme is expected to lessen the impact of COVID-19 and facilitate the opening up of economies across the world. Treasury has projected an economic rebound with a growth of 7,8% expected in 2021 supported by the recovery of the agricultural sector, monetary and fiscal stability.
GDP growth for the year 2021 is envisioned to remain strong anchored on a better 2020/21 rainfall season, higher international mineral commodity prices, stable macroeconomic environment and managed COVID-19 pandemic.
In the first half of the year, FBC said local companies performed relatively well and the industry as a whole remains bullish about the second half of the year.
But some major challenges experienced in the first half were delays in the settlement of auction market bids (production bottlenecks), high labour costs as companies adhered to COVID-19 regulations and digitalisation of operations.
“These challenges meant that the industry remained sceptical about sustainable economic growth and medium-to-long-term business prospects. It also meant that costing and pricing of goods remained a challenge as not all foreign currency needs could be met from auction allocations,”
FBC Securities said.
The foreign currency auction has contributed to the reduction of inflation from a high of 837% in July last year, easing to 56,37% last month.
This is the first time the country has registered a two digit inflation figure in two years after it skipped to 175,66% in June 2019 from 97,85% in May of that year.
FBC said opportunities in the first half were precipitated by an auction system which ushered some economic stability. COVID-19 created an opportunity for industral growth through increased local demand as supply chains remain disrupted.
Moreso, it noted, an agricultural bumper harvest provided raw materials for agri-businesses.
“The opportunities present industry stakeholders with a chance to get significant levels of foreign currency through formal channels, thus eliminating price instability.
“Secondly import substitution creates room for industry to grow and seize market share from imported brands,” FBC Securities said.