HomeOpinionDollar continues getting battered

Dollar continues getting battered

Paul Nyakazeya

THE weakening of the Zimbabwe dollar against major currencies has been a reflection of the rise of real prices of commodities relative to prices of the sa

me goods in US dollars.

Considering exchange rate relationships, an exchange rate of US$1 to $840 000 measures in part how much of a good (for example one loaf of bread) is paid in US dollars relative to the price for the same good in Zimbabwe — the purchasing power parity.

It can be observed that the parallel exchange rate of US$1 was $2 900 on January 2 before it shot up to $840 000 on Tuesday this week, but price levels of goods purchased in the US remained at US$1 between January and October 23, while the price levels of the same goods over the same period in Zimbabwe moved in relative terms from $2 900 to $830 000, representing 28 520,6% inflation per annum. A bank transfer is being done above $1,2 million.

The crash of the dollar against major currencies has eroded the purchasing power of consumers who were already reeling from high prices and shortages of basic commodities. Apart from the fall of the dollar on the parallel market, there was a state of collapse of certain systems like water, telephones, power and health.

Zimbabwe Allied Banking Group (ZABG) group economist David Mupamhadzi said the movement of the dollar on the parallel market reflected high demand and depressed supply.

“The impact is being felt by the ordinary man on the street as prices of goods and services are being priced using parallel market rates when disposable incomes are not being adjusted in line with parallel market rates,” Mupamhadzi said.

Other major trading currencies — the British pound, the South African rand and Botswana pula — were moving around the benchmark US dollar rate.

The local unit was trading above $1 700 000, 125 000 and 140 000 to the British pound, the South African rand and Botswana pula respectively on Tuesday.

The local currency opened the year trading at $5 100, $380 and $400 to the British pound, South African rand and Botswana pula respectively.

Mupamhadzi said the situation had become so bad companies and individuals were buying foreign currency as an investment tool to hedge against inflation.

“The country urgently needs balance of payments support since it does not have capacity to generate enough foreign currency,” said Mupamhadzi.

Some exporters this week said the fair value of the Zimbabwe dollar was estimated to be above $1 million. The fair value is the realistic value of the currency taking into account inflation differentials between Zimbabwe and its trading partner countries. It is not necessarily the official exchange rate.

Economic consultant, John Robertson, said it was not an intelligent move to control the exchange rate when there was a serious scarcity of foreign currency on the market.

“People will turn to the more lucrative parallel market and thus widen the spread with the interbank rate. The mechanisms being addressed by government have over the years been wrong as the scarcity problem was not being addressed,” said Robertson.

Robertson said buyers were increasing in numbers, but there were no sellers on the official market.

“The central bank should boost foreign currency inflows by promoting exports,” Robertson said.

The country’s streets are paved with discarded Zimbabwean dollar notes which is not common in any country in the world and nobody bothers to pick them up reflecting how far the currency has lost its value. The local currency has become a conundrum, even a joke, to many Zimbabwean children.

According to the Zimbabwe Congress of Trade Unions, 80% of the country’s population is unemployed and living below the poverty datum line.

Former president of the Zimbabwe National Chamber of Commerce Luxon Zembe said it did not make economic sense to control the exchange rate when inflows were depressed, as it will only widen the gap.

“The exchange rate should be determined by market forces,” he said.

The rate at which the Zimbabwe dollar was losing value on the parallel market indicates how the local money was quickly becoming worthless, payments in kind and barter trade slowly becoming the order of the day.

Price quotations are now valid for at least three days.

Economists said the country’s economy is being carried by the informal sector, arguing that if it was totally formal, it would have totally collapsed a long time ago.

Apart from demand and supply, the direction of the movement of the dollar had been triggered by skewed policies by government, the Reserve Bank buying foreign currency on the parallel market and availability of fuel.

Genesis Bank group economist Brains Muchemwa said the fall of the dollar on the parallel market was a result of more imported inflation on household balance sheets especially considering the high propensity to import caused by the huge output gap that exists in Zimbabwe.

“Because wages are not indexed to the exchange rate depreciation, consumers get worse off. Of late the sharp depreciation has emanated from acute broad money supply growth and heavy imports for almost all commodities as evidenced by availability of imported South African goods in most retail shops in town on basic commodities, from toothpaste to juices that are not under price controls,” Muchemwa said.

Muchemwa said there was no way to stop the current acute depreciation at the present moment, so the freefall might continue for a little longer.

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