ZIMBABWE’S foreign currency market was this week struck by a fresh wave of turbulence as the local unit plummeted to a low of $280 000 to the g
reenback on the parallel market due to renewed buying pressure and also in response to the devaluation last week.
The 99,2% devaluation in the Zimbabwe dollar exchange rate against the US dollar from $250 to $30 000 by the Minister of Finance Samuel Mumbengegwi when presenting the mid-term fiscal policy and supplementary budget last week has given a spark to the export sector creating renewed buying pressure on the market.
The local unit had been trading at $250 to the US dollar since July 31 last year.
The country’s defenceless dollar which opened the year at $2 900 to the greenback crashed to fresh depth this week on the thriving parallel market reinforcing gloomy forecasts of an unprecedented acceleration in the rate of inflation currently at $7 634,8% for July.
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 $490 000, $44 000 and $39 000 to the British pound, the Botswana pula and the South African rand respectively on Thursday.
The local currency had opened the year trading at $5 100, $400 and $380 to the British pound, Botswana and South African rand repectively.
The crush of the dollar against major currencies erodes the purchasing power of consumers who were already reeling from high prices and shortages of basic commodities.
Considering exchange rate relationships, an exchange rate of US$1 to $280 000 measures in part how much of a US good (for example one loaf of bread) is paid in the US relative to the price paid for the same good in Zimbabwe — the Purchasing Power Parity.
The progression of the Zimbabwe dollar exchange rate is a reflection of the progression of real prices on the ground in the country relative to prices of the same good in US dollars.
It can be observed that the parallel exchange rate of US$1 was $2 900 on January 2 shot to $280 000 as of yesterday, but the price level of goods purchased in the US remained at US$1 between January and September 6, while the price level for the same goods over the same period in Zimbabwe moved in relative terms, from $2 900 to $280 000, representing 9 655,1% inflation per annum.
Bank economists this week said the Zimbabwe dollar was still battling to find a bottom on the parallel market due to escalating demand from both institutional buyers and individuals trying to escape inflation-induced losses on local currency holdings.Economists also said the dollar would crush further on the parallel market in response to the devaluation by Mumbengegwi.
Economic consultant John Robertson said parallel market rates would continue to rise until foreign currency inflows improve and major sectors of the economy start performing.
“The hyperinflationary environment had made it unattractive to hold the local currency when costs for goods and services go up almost everyday,” Robertson said.
Independent economic analysts this week said the frail currency would reach a fair value of $1,5 million to the US unit by December.
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.
The projections support gloomy forecasts made by the International Monetary Fund (IMF) suggesting that Zimbabwe’s economic crisis in likely to accelerate at an unprecedented rate next year with inflation likely to average 100 000% by December with real gross domestic product (GDP) contracting by 4,7%.
Apart from demand and supply, the direction of the movement of the local currency to the US dollar had been triggered by policies adopted in the monetary policy, increased maximum cash withdrawals, the Reserve Bank buying foreign currency on the parallel market, adjustment of the exchange rate and availability of fuel.
Zimbabwe is currently battling an acute foreign currency shortage that has stoked severe fuel shortages and disrupted normal economic activities.