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Exchange rate Armageddon near

Editorial Comment

THE Monetary Policy Statement (MPS) released last Friday supplied data which when analysed show that unless drastic measures are taken, our local currency will take a heavy battering in the coming weeks.

At the time of writing, the Zimbabwe dollar:United States dollar rate had breached the 16 level. Following the end of the use of multi-currencies for local transactions on June 24, the grey market for forex almost ceased trading, leaving the interbank market as the only source of forex for major players.

This caused the interbank rate to shoot from about six to nine. Three weeks later, the parallel market resurrected and opened its trades marginally above ZWL$10 to the greenback, far from the dizzying near-15 it was climbing towards before government pulled a shocker, banning the use of multi-currencies. We have hurtled past the then dreaded 15 level.

On July 14, I wrote an article titled Exchange rate upward pressure on, in which I proposed three scenarios for our exchange rate movement, with each scenario based on a set of assumptions. In scenario one, we had our exchange rate stabilising around ZWL$3,2 to the US dollar.

This exchange rate was based on government maintaining broad money supply at the then reported level of ZWL$10 billion.

Further assumptions were made:

(i)Government would pay then proposed government salary adjustments wholly from the claimed budget surplus without resorting to borrowing from the market;

(ii)Banks would not engage in any significant credit-creation due to the overnight interbank borrowing rate of 50% which had been imposed by the Reserve Bank of Zimbabwe (RBZ);

(iii)Government would not fund the Command Agriculture and Presidential Inputs Scheme from Treasury Bills (TBs) and through the overdraft facility with the RBZ;
(iv) Government would print new notes to the extent of US$1,5 billion (15% of broad money supply), but retire electronic balances of the same amount;

(v) Nostro account balances remaining largely unutilised as it was at the time assumed that the majority of nostro account holders were likely to use them as a store of value, thus preventing the flooding of the market with extra local currency;

(vi) TBs worth US$2,2 billion maturing this year would be rolled over, preventing pouring in extra liquidity into the economy. This would have left us with a liquidity of circa ZWL$1,5 billion in money zero maturity (MZM) terms. MZM is now the preferred metric of analysing the impact of money supply on key economic variables and outcomes.

I quickly dismissed the scenario of a ZWL$3,2 to the US dollar rate as unrealistic. This was the scenario that the monetary authorities and their trusted advisers were predicting. We all know that 3,2 never happened.

Scenario 2 brought in the possibility of the US$2,2 billion TBs being re-priced to ZWL$2,2 billion and repaid. This would bring our MZM to circa ZWL$3,7 billion, dictating an exchange rate of ZWL$7,9 to the dollar. Around July 14, the interbank rate was indeed fluctuating around the 7,9 level.

Scenario 3 was the Armageddon scenario. Here all the remaining assumptions would not hold. We predicted a rate of ZWL$22 to the US dollar under this scenario. We then argued that at that level, the confidence deficit factor would be amplified and from the 22 level, the rate would soar to who knows where.

Monetary, fiscal and other economic developments after I published the three scenarios have supplied data giving us clues on the likely direction of the exchange rate and its pace of movement.

The MPS published last week showed broad money supply has soared by 50% to ZWL$15 billion. The RBZ claims that the ZWL$5 billion in money supply was due to the liquidation of nostro account balances into the local currency. On that note only, our MZM should be circa ZWL$8,7 billion. Based on my model, this dictates a ZWL$:US dollar rate of 18,5.

The market is fast heading towards that level. To arrive at this level, we have put faith in our government that it will stick to its promise not to fund government salary increments, Command Agriculture and the Presidential Inputs Scheme from borrowings (TBs and RBZ overdraft).

To see where we are headed, we need to consider our future forex generation capacity. Our forex receipts for the first half of the year declined by 24% from US$3,396 billion from the previous year to US$2,582 billion.

Mining export receipts, our chief forex cash cow, declined by 19,6%. Gold deliveries to the RBZ declined by a whopping 40,6%, representing a decline of five tonnes.

This decline is concerning as it relates to confidence issues: the RBZ not paying on time and an interbank market offering a lower exchange rate than the parallel forex market. The RBZ conceded on these points.

The RBZ omitted to mention that its forex retention policy, coupled with a poor interbank market where miners are forced to offload their forex, contributed to this calamitous fall in gold deliveries. On January 1 2019, gold was selling for US$1 281 per ounce, closing the first half of the year at US$1 409 per ounce.

Gold prices have been on a steady rise from January, yet gold export earnings have declined — this is testament to retrogressive government policy. It does not need any Fourth Industrial Revolution science to decipher that a lot of gold production found its way to unofficial markets.

Farming forex earnings dropped by 9,9%. The same problems faced in mining in terms of forex retention policy contributed largely to this decline.

Tourism forex receipts plummeted by 30,5%. International money transfers declined by 13,5%. This a perfect indicator of lack of confidence in our economy — I bet that a significant amount of diaspora remittances are coming through unofficial means.

Going forward into next year, we will likely see a serious erosion of forex generation capacity. Things are not looking well in tobacco — output is likely to significantly decline next season due to an unfavourable monetary policy that will likely continue with the high forex retention thresholds; so it is with mining.
Given that the RBZ has used both tobacco and gold output as guarantees for Afreximbank short-term bridging loans, the decline of these two key earners of our forex will, in all likelihood, shut the door on significant relief funds from Afreximbank.

The RBZ has hiked the overnight interbank borrowing from 50% to 70%, making borrowing more expensive, killing any hope for productive sectors to get affordable financing. This may depress our forex earnings to less than US$400 million a month, which is what is currently obtaining.

When I published the forex movement scenarios on July 14, our export earnings assumptions were based on the US$470 million per month that had been reached in 2018. At US$400 per month of forex earnings, the exchange rate should be circa ZWL$21,75 to the US dollar. We could be headed towards this level.

The MPS was mum on the ZWL$2,2 billion TBs maturing this year. This is a potential time bomb that could further batter the Zimdollar further.

This would swell our MZM to circa ZWL$10,9 billion, necessitating a rate of 27,25. We may climb higher, given that Treasury projects a budget deficit of 5% of GDP this year — the budget surplus days seem to be over.

Our prayer is Finance minister Mthuli Ncube holds firm and does not buckle under pressure to fund government salaries, Command Agriculture and the Presidential Inputs Scheme outside the budget. If he capitulates, the rate will go feral.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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