Currency stability far from being achieved


IN the latest foreign auction trade on the Interbank Market, the Zimbabwean dollar halted an eight-week stretching decline. The currency gained a minute 0,004% to close firmer as demand declined.

Last week’s decline of 0,33% came in as the worst in three weeks. This week’s stable performance is encouraging given the aforementioned eight-week decline. Over the 13 trading weeks in 2021, the widest weekly loss was seen at 0,84% while cumulatively, the Zimdollar has lost 3,4% since the beginning of the year in formal trades.

The formal market remains the closest proxy of fair market value estimation given the volume of trades sailing through weekly as opposed to the parallel market. Over a 13 week period (from the beginning of 2021), the local currency lost value in 10 of the interbank weekly sessions.

The chart shows a historical computation of interbank rates per session since January 2021. It also displays the highest and lowest bid levels per session and lowest acceptable bid level. The lowest acceptable bid level is the threshold considered for purposes of allocation.

The chart, more importantly highlights the weighted average rate. This refers to the rate arrived at after considering each buying point in relation to volumes of trades.

From the chart, the level of top bids continues to reveal stability at around 87, now running for the 6th week. The average rate which stabilised in the week under review showed significant strains over the last three weeks. We conclude that the aggregate is not yet fully stabilised.

The lower bids and lower accepted bids have been in sync over the last seven weeks. Synchronisation of the lower bid and the lower accepted bids reflect how all bids posted are being satisfied (matched) through allocation.

This is further demonstrated by the rate at which total bids receive allocation. Since the beginning of the year, only two trading sessions saw allocations lagging demand (bids).

What is significant to read from the statistic is the demand levels being matched by supply. Since the total bids represent all the funds requiring forex allocation, a 100% supply, essentially cushions the currency from drastic losses.  Further review of the data shows that cumulatively, the auction system has supplied US$450,05 million since the beginning of the year. This comes down to an average weekly allocation of US$34,5 million per seven-day week and a daily average of about US$4,9 million.

Assuming a five-day trading week, the allocation would deduce to a US$6,9 million weekly allocations. For 2019, RBZ reported that daily allocations for a five-day week averaged US$2 million. This means average supply (trade) levels on the interbank have improved by about 300% between 2019 and 2021. The year 2019 is significant in the sense that it is the year the government undertook currency reforms, which consequently ushered in the Zimdollar.

As a follow up, a forex market was officially unveiled; but with significant manipulation by the RBZ, the market did not attract sufficient trades, hence the low trading activity levels.  In turn, the low flows hurt industries as companies failed to import critical raw materials and capital goods. The net results reflected in a GDP decline of -10%, further compounded by drought conditions and austerity.

An interesting dynamic in the week under review is the decline in allocation levels. Total allocations, which would appropriately be termed total valued traded, came in at US$25,5 million. This represents a 29,4% decline on the prior week.

A look at broader data shows that the weekly turnover level achieved was the lowest since October 2020. More definitively, the interbank has not had an allocation or total value of trading of below US$30 million since October 2020.

The level of trading activity is important in that it reflects the interplay of demand and supply of foreign currency and the resultant equilibrium level. When demand is low, net flows represented by allocations also come off. More importantly, low demand given constant supply levels would drive the weighted average exchange rate downward. The reduced demand levels in the week under review drove the weighted average exchange rate down, which would mean appreciation of the local unit.

The question is whether this stable performance can be sustained going forward. This would help in predicting the future stability of the currency and perhaps that of the economy.  Assuming a five-day week, the current week’s allocation levels (demand) represent a deduction of US$5,06 million forex allocation per day or US$3,6 million assuming a seven-day week. Already, this level of interbank funding is insufficient to cover for the overall import needs.

At the current run rate, total interbank flows for the month would come in at US$101 million, which would be way less than the monthly import bill of circa US$460 million as per January levels; a variance of US$359 million.

It would mean that interbank flows are only covering 22% of total flows required to satisfy the import bill. Generally, exports receipts are primed as the main source of forex supply and with a 22% contribution, the gap left is too large to be covered by other means. Last week we highlighted that other sources of import funding include own purchases by exporters and lines of credit. Remittances are already factored in weekly interbank supplies.

At prior levels averaging about US$35 million a week, forex flows required to satisfy the import bill showed a gap even after factoring all other funding mechanisms. A lower level of US$25 million as attained in the week under review would therefore widen the gap. This would mean further pressure on the rate to rise in the near term to close the gap and would also put more pressure on the parallel exchange rate.

Our view at Equity Axis is that the short term stability currently being enjoyed has largely been driven by external lines of credit and RBZ’s control of supply through retention funds.

However, the stringent measures put in place to access the forex have crowded out most economic players who in turn are resorting to the parallel market.

These players are mainly in the SMEs and informal sectors. It is our view that the variance between the interbank and parallel market rates will continue at current (wider) variances given the deductions made below.

The economy will have to improve at a much faster rate of above 10% (GDP growth) in order for the gap to come down to acceptable premium levels of below 20%.

To stop further widening of the gap, RBZ measures to stem money supply growth will have to remain in place.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. —