HomeEditorial CommentBeware of volatile exchange rate

Beware of volatile exchange rate

THE past three months have been the most difficult in Zimbabwe’s current battle to stabilise its complex economic crisis. Shocks have particularly been felt the hardest since July, when exchange rate volatilities spiralled out of control, with the Zimbabwe dollar losing ground on both the parallel market and foreign exchange system, where backlogs have been haunting approved recipients and central bank chiefs.

But it is on the stubborn black market that most of the jitters have been felt, with the Zimbabwe dollar depreciating from about US$1:ZW$120 in January to US$1:ZW$180 currently — the worst battering experienced in recent times. The bad news is that, while authorities have mooted a plot to deny that the economy could be headed towards the deathbed, analysts are already projecting the black-market exchange rate to spike to US$1:ZW$200 by year end, possibly US$1:ZW$250. By denying the obvious saying the official rate is stable, authorities are shooting themselves in the foot. In the scheme of things, the official exchange range does not matter. It is the black-market rate that matters because it is the one that affects everyday life — citizens earning meagre Zimbabwe dollar salaries have to approach this expensive market to buy the hard currency for their domestic requirements. Now, even companies have joined them.

Zimbabweans know exactly what this means — rocketing prices, spiking inflation and extended suffering. The official foreign exchange system, which is subsidised by the general public, is for the big firms.

This demonstrates how uneven the Zimbabwean economic landscape is at the moment. It is clear that the domestic currency has been losing traction due to foreign currency shortages being experienced on the auction system, which at its peak last year, was able to defuse the influence of black-market kingpins, giving firms capacity to produce cheaply and compete on the international markets.

This is now history. Big firms are trooping back to the expensive currency black market for their foreign currency requirements, and demand has shot through the roof. This has had damaging effects on the cost of production. This is why prices have rocketed, with consumers taking the biggest shocks. The debilitating effects of the problem will soon be felt across sectors. Weak exchange rates make international trade and investment decisions hard because volatility increases exchange rate risk. Volatile exchange rates can quickly and significantly change the expected rates of return on international investments.

In addition, weak exchange rates significantly change profitability in importing and exporting firms  — the unpredictability is high.

The ability to generate foreign currency and attract foreign direct investment is tapering off as the currency crisis continues.

Firms considering Zimbabwe as an investment destination will go back to the drawing board and reconsider their options.

Some will delay releasing funding for their chosen projects, while others will not return. That may sound easy to say. The global economy is today ruled by a network of powerful firms called fund managers, who decide where to send funding. These networks communicate and once they blacklist a destination, reversing it takes long.

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