CURRENCY instability remains one of the fundamental challenges the Zimbabwe economy is facing. The lack of a stable exchange rate stems from weak economic fundamentals such as high inflation, cash shortages, low confidence, higher injection of new money to base money, lack of reserves and a sustained trade imbalance.
The exchange rate closed the week at 1:25 on the parallel exchange against the United States dollar, which is a mere 2% recovery since the suspension of bank accounts suspected to be involved in illegal currency trading a fortnight ago. Compared to September 2019 when a similar move was made on a number of accounts belonging to different companies, the 2% Zimbabwean dollar (Zimdollar) recovery in the current year is not significant.
In September 2019, the Zimdollar recovered by 36% over a single session immediately after the suspected accounts were suspended. The variance in the magnitude of Zimdollar recovery between the two periods shows that either the proliferation of such activities has become more rampant in the current year compared to the prior year, such that gagging one player will not effectively cause the rate to significantly recover or the obtaining exchange rate at the material time of account suspension last year was not so much far away from the Zimdollar’s intrinsic value.
Whichever way one chooses, given the near non response in the exchange rate to the accounts suspension in the current year it is now very clear that the Zimdollar faces significant downward pressure and that its freefall has become nearly impossible to halt. What the RBZ can do is only to moderate the rate of decline but not to reverse the southward trend.
I see the current strong buying on the Zimbabwe Stock Exchange not only as a way of market correction, but as an investors’ way of shorting the Zimdollar, based on a more adverse outlook projection. It would follow that if the outlook posits a favourable outturn, the exchange rate and inflation would stabilise. Once these stabilise, it would favour growth in earnings with stable prices or retained inflation adjusted earnings. Naturally, stocks would trade more stable and only rise at a more gradual pace. But alas the stock market has already touched a high of 50% gain already, within only 23 sessions in 2020 pointing to serious risk aversion and pessimistic outlook view.
Likewise technical indicators all point to further weakness on the outlook and these include the level of variance between the interbank and the parallel exchange rate, which is presently at its widest since February 2019. The rate variance currently stands at 49% which is its widest gap since February 2019, a key pointer towards exchange rate instability.
In the same vein, the OMIR is running significantly ahead of both the interbank and the parallel rate whereas the variance is at its widest at 89%. Combining these indicators, it is very apparent that the Zimdollar is more likely to weaken further as the rates converge. The trade gap for 2019 came in at the most conservative outturn since 2010 at -$0,5 billion, which may point towards subsiding forex pressure.
But a more clearer analysis of the data shows that exports are actually falling, coming off by 3% from 2018 levels, even as the imports decline is negatively affecting local production. The short-term impact will be a dearth in production and shortages of commodities as well as proliferation of imports
What could possibly deter this path is an injection of new forex money into the economy of not less than US$3 billion. The new flow, if sourced, should not be channelled solely towards currency stabilisation but more on the productive side, financing mainly national projects with net positive returns. Our level of FDI, however, remains unconvincing largely due to macro instability, weak policies, regulation and corruption, factors which remain unattended to.
Short-term bridging flows, will not set the country on a sustainable path as they will drive foreign debt further up without inspiring commensurate production to cover the cost of funding.
Gwenzi is a financial analyst and managing director of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com