Respect Gwenzi
THE Zimbabwean dollar (Zimdollar) has begun the year 2022 on a very rocky start and yet the Central Bank appears to have a contrary view.
The Reserve Bank of Zimbabwe (RBZ) has said the Zimdollar exchange rate has been stable since February, following policy interventions.
The local unit now in its fourth year of trading since reintroduction has lost a whopping 18% since the beginning of the year. The loss has been accrued over a total of just eight sessions or rather over two months.
The auction market reopened on January 18 following a three-week break effected in December 2021. This is the quickest loss in the Zimdollar since 2020.
For context, the Zimdollar lost about 28% over the whole of 2021, which had a total of 49 trading weeks/sessions. Over the same period last year, the Zimdollar had only lost 2,6%.
This means the currency is losing ground much faster in the current year compared to the prior year and at current rates, the Zimdollar may be headed for a huge crush over this year.
The top bid moved up to ZW$140, from ZW$135 in the prior week. The top bid was stable for two weeks before the current week’s move.
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Cumulatively it has gained 15 points since the beginning of the year, which is in line with the average exchange rate cumulative depreciation.
The lower accepted bid levels moved up by six points, one more than the top bid, a depiction of demand pressure. The aggregate has gained a huge 27 pins since the beginning of the year.
This demonstrates the sustained pressure for the average exchange rate to fall. The weighted average exchange rate came in at ZW$130,2, down from ZW$127,5 a week ago.
On average the Zimdollar has shed about 2,1% a week since the beginning of the year. This is its worst performance since the second half of 2020.
The unprecedented onslaught on the Zimdollar comes on the backdrop of a number of factors namely rising imports volumes and values respectively.
While safe haven trading has sustained positive gold prices trajectory, a key export commodity for Zimbabwe, we expect the downside impact of higher oil price to undercut the gains, resulting in a very wide trade deficit margin.
The huge cost of fuel now projected to reach US$200 a barrel, is likely to strain forex demand in Zimbabwe, causing further market instabilities.
Our expectation is that forex challenges will be more severe exacerbated by a poorer agriculture season, rising international agriculture commodity prices, civil service wage adjustment and pre-election impulsive spend by spend.
While RBZ is attempting to keep money supply in check by pushing base money targets to more conservative levels, the rise in broad money, reflects the impact of credit growth in the broader economy driven not only by production but speculative borrowing and extensive utilisation of open market operations.
The open market operations, largely targeted mopping up excess liquidity, are influencing monetary growth through interest payment.
Earlier in this review, we highlighted that the Zimdollar is losing ground against the greenback at a much quicker rate compared at any other period since the second half of 2020.
This is a period of over 18 months. Essentially this means the Zimdollar is at its most unstable position, since the reintroduction of the auction market in June 2020.
But this view, does not take into account parallel market operations. When looked at together, the view becomes clearer and it is easier to draw conclusions from the respective performances.
In the first eight weeks of trading in 2021, the Zimdollar lost only 2,4% while in the latest situation, it has lost 18%, over the same duration.
Now, if we look at the relative performances between markets, we see that the parallel market presently reflects the widest margin to the auction market, than at any other point since June 2020.
The eight-week average premium (year to date) is at 85%, which is insanely higher, looked at against a relative 45% average premium over the same period last year.
In-fact the average parallel market premium for 2021 was at 58, which although higher than the first few of the respective year, is way lower the prevailing premiums in 2022.
What this statistic helps to understand is that the whenever the premium is above 65%, there is significant volatility in the formal auction market.
Infact the rate will not stabilise until the gap is closed.
As long as the huge gap prevails, the auction market will continue to see steeper weekly exchange losses.
Why is this so? It is because the gap causes arbitrage between markets and thus arbitrage itself increases demand for forex outside of productive sector demand.
Players bidding on the formal now have the comfort of the parallel rate in mind, such that they can stretch their bids higher and not worry about losses, even so as most of them are charging their products using the parallel rates.
Either way they take it, they are in profits and always maximise chances of getting forex on the auction through higher bids. But this is not the end of the story.
For avoidance of doubt, we believe the RBZ controls the auction exchange rate and its movement so far in the year is sanctioned by it.
Why would the Bank allow the rate to move so high, if it jeopardises its objective of price and financial stability?
The RBZ ran its cost benefit analysis and concluded that worse off premiums above 70% are not sustainable for the economy. They cause serious arbitrage, which in turn feeds into itself and thus abating the status quo.
The underside of arbitrage is that it kills real production thus disincentivising production and at the same time promotes speculation.
The arbitrages are exploited at the expenses of exporters, who are made to surrender forex at suboptimal rates. Gradually and tactically exporters may scale back production.
Arbitrages are inflation fuellers and have a significant multiplier effect. The higher the premium, the more increased arbitrage opportunities are in the market.
In the end, the government also loses income while subsidising sections of the market.
It is, therefore, a better devil for the Bank to let loose the exchange rate to a point where the premiums are softer.
The unsolvable is that the premium is not entirely at the discretion of the RBZ. Increasing flows on the auction can drag the parallel exchange rate movement, but it cannot entirely stop it.
Other forces, such as broader economic fundamentals, have a bearing on the outturn and these are the variables the Bank and the Treasury have failed to control.
- Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — [email protected]
