By Respect Gwenzi
A MAJOR highlight of this week’s auction is the magnitude of currency depreciation. The Zimbabwean dollar (Zimdollar) weakened by the highest weekly margin since the beginning of the year, a strong signal for the beginning of a market correction.
A market correction typically happens when market players change tact and sentiment regarding the price direction of a certain asset. In the case of Zimbabwe, the direction the Zimdollar has taken has not changed, since it has been weakening for months on end, but, it is the magnitude of loss incurred in the current week and the backdrop of stable predicted prior loss, which strongly affirms a bearish trajectory.
The week under review’s outturn comes on the backdrop of the introduction of a raft of measures to stem the mega premiums on the parallel exchange, now seen nearing the dreaded 100% mark. The RBZ has, in recent weeks published a list of auction market beneficiaries as well as alleged currency manipulators over two rounds. The identified parties have had their bank and mobile money accounts frozen, apprehended and awaiting prosecution.
From the chart, the blue line in the middle showing the Weighted Average exchange rate, clearly reflects the quickening depreciation over the most recent three weeks.
The rate of depreciation has increased from 0,12% between June and August, to 086% from mid-September into the October. Lower bid and highest bid levels have likewise increased over the same period maintaining an almost unchanged spread. These trends further shows that the market is in sustained weakness.
While the performance has been much more mild and hailed by industry has stable and encouraging, a worrying static is the variance between the auctions, official rate to the parallel market rate. The parallel market premium is currently at 75% with the local unit trading at a range of between 155 and 160 to the US dollar. This is very alarming as it signals the implosion of the formal currency market. 2 factors are worth noting in this regard. The first is that the parallel market serves a wider informal market and a section of the formal market. Zimbabwe’s economy has a huge informal sector and these largely rely on the parallel market to source and change foreign currency.
In respect to trades conducted in local currency, which are however few, prices are pegged at slightly higher rate to the parallel market. Given years of deindustrialisation, Zimbabwe’s economy is now clearly driven by micro informal players, even in critical sectors such as mining.
This has led to a proliferation of the parallel market, further compounded by the huge diaspora remittances, and now seen doubling in 2021, having breached the US$1 billion mark in 2020.
The second factor is that part of the formal businesses with access to the official currency market may have objectives other than to import and these include value preservation. In the past this has happened with respect to government suppliers who are paid huge chunks for their service at once, but in Zimdollar. These funds are surreptitiously channelled towards the parallel market through a web of forex dealers. Some of these payments have been done outside of the budget and thus requiring the RBZ to create new money, in turn impacting money supply levels. These shocks, through Base Money (RM) have significantly contributed to the status quo. In a bid to inspire confidence in the currency, the RBZ recently allowed the purchase of US$50 a week, through banks and other financial institutions, but this too is turning out bad, and likely fuelling the parallel exchange rate.
Given the huge parallel market premium citizens with access to the funds are incentivised to “burn” the USD and earn an extra few Zimdollars, in this case they would have created 75% more on the initial ZW$4500. This small weekly flow can make all the difference to most given the levels of poverty and joblessness in the country.
A lot have asked why the rate is running on the parallel market. The baseline position is that market confidence in the formal market has waned significantly over the last few months as the Bank failed to settle traded funds on time. Likewise base money supply has disproportionately been higher than the growth in production, which causes inflation. The RBZ is running a backlog of US$150 million, which is equivalent to about 3 weeks of auction market trades. Some payments have gone beyond a month before being settled and this has rattled the market. Essentially, the time value of money denotes that a dollar today is worth much more tomorrow, which means, a dollar not settled today, is worth much lower at the point of settlement if paid for in the same exact amount. The odds are highly staked against the local unit, as we head towards the final months of the year.
The real challenge on the outlook is how to keep the generators of forex happy. History has shown that this is very delicate matter, particularly to the much more decentralised sectors such as gold mining, which are critical generators of forex.
The huge premiums disincentive production and can results in a scale back in production across exporting industries. This would mean reduced forex inflows and further pressure on the exchange rate.
Government is aware of the challenge and this means urgency is required, lest the local currency suffer a natural demise. The options at government’s disposal are minimal even as time is scarcer. Government can aim to contain expenditure, without necessary further trim back on sectors long deprived such as education and health. Utilise IMF funds to spur infrastructure developments, which may not yield immediate concrete benefits, but a stronger mid to long term position. In the interim, confidence levels will improve as citizens see the progress on the ground, and temporary employment generates increased consumption in the economy. above-board and formalised currency exchanges.
- Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org