Prices Rocket As Dollar Tumbles

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 same goods in US dollars.

 

Considering exchange rate relationships, an exchange rate of US$1 to $75 billion 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 $1,9 million on January 2 before it shot up to above $75 billion on Thursday this week, but price levels of goods purchased in the US remained at US$1 between January and July 16, while the price levels of the same goods over the same period in Zimbabwe moved in relative terms from $1,9 million to $75 billion, representing 39 473 584% inflation per annum. A bank transfer is being done above $28 trillion.

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, communications, power, education 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 $1,4 trillion and $800 million to the British pound and the South African rand.

Mupamhadzi said the situation had become so bad that companies and individuals were buying foreign currency as an investment tool to hedge themselves from 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 trillion to the US dollar.

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 depressed production and shortage of foreign currency was driving parallel market rates up.

“The mechanisms being addressed by government have over the years been wrong as the scarcity problems and production side are not being addressed,” said Robertson.

The dollar has lost value to the extent that 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.

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

Finance minister Samuel Mumbengegwi blames the economic decline on sanctions which he said were advocated for by the opposition Movement for Democratic Change.

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

Price quotations are now valid for one day. Leading retail giants Edgars have taken to marking up after every two or 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 collapsed a long time ago.

Apart from demand and supply, the direction of the movement of the dollar had been triggered by inconsistent economic and political policies by government and the Reserve Bank.

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, 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 while longer.

By Paul Nyakazeya

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