IN its 32nd week of trading on the interbank market, the local unit pared against the United States dollar suffering its worst decline in five months. At 0,84%, the Zimdollar (ZWL) loss for the previous week was the worst seen since August 13, 2020.
The interbank began on a volatile note after its resumption in late in June 2020. The Zimdollar, however, went on to largely trade stable against the USD over a period stretching 21 weeks between mid of August 2020 and late January 2021.
Since late 2020, we began questioning sustainability of the stability experienced on the interbank given some observations within and outside the market. First was the widening variance between the interbank rate and the parallel rate.
As can be noted in the chart at the bottom left of the report, the variance has widened from a premium of 23% in October to 44% in January. The parallel rate premium is now seen moving towards the June levels of 48% that is around the time the interbank market resumed.
On the outlook, holders of forex are disincentivised to participate on the interbank, thus reducing long term supply of the hard currency. The real challenge becomes that of trusting the interbank market where variances are widening beyond acceptable thresholds as has happened in the past and now worryingly recurring.
Admission by the RBZ that the Bank is minting cash (injecting new money in the system electronically) to procure forex from exporters is of significant proportions as we try to digress the subject of currency stability and interbank reliability.
The Bank argues that the net effect of injecting new money to procure forex for onwards transmission to the interbank is zero. This is the same logic the Bank used in introducing the Bond notes, a pseudo currency which partially contributed to the late dollarisation economic crisis.
Now if RBZ injects ZW$1 billion (US$ 12,05 million) a week, it procures forex at a rate of 83 and suppose the rate does not change from last week, it forgoes the same on the interbank and redeems the ZW$1 billion it used last week. For money supply to remain constant, the Bank does not have to inject new cash every other week, but instead should use the redeemed funds as a revolving fund for acquisition of forex.
If the bank, redeems last week’s ZWL$ through auction sales of forex and go on to inject new cash of similar amount it will be spontaneously increasing base money supply in the economy.
Suppose the Bank argues that it is not injecting new funds but rather using a revolving fund to purchase the forex, the question turns to rationale of compulsory acquisition. If the aim of the Bank is to onward transmit the funds to the interbank, then it means the end buyers (interbank demand) could directly procure from willing sellers at a market rate.
Why then would RBZ not let the market procure its entire requirements directly from exporters. This is because procuring for onward selling gives the Bank control of the market and hence the exchange rate.
Weekly RBZ injections totalling ZW$1 billion would procure funds that cover at least half of the current interbank demand and that make the Bank the market maker.
As the market maker, the Bank now controls the exchange rate and thus over time, the variances between the interbank and the parallel market widens. There is
always a tendency by exporters to hold on longer to forex balances and this causes supply deficits and given a rebounding industry, demand would typically out swell supply.
These are some of the major dynamics at play on the interbank market. A look at base money levels shows that in 2020 alone base money grew by 117%, with much of the growth being accumulated in the first half period of the year.
Between June and December, base money grew by 45%. The current weekly growth levels, however, do not reflect ZW$1 billion weekly growth levels, thanks to improving government revenue. We are of the view that the exchange rate can return to stability if government focusses on productive sector support and speeding up of economic reforms.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com.