AT the end of 2020, industry painted a very bright picture about the monetary state of the economy. The Zimbabwean dollar (Zimdollar) currency was stabilising, so they said, going on to attribute the stability to a more guarded fiscus management.
Most business leaders believed that the economy was on the right track and therefore painting a rosier outlook to their operations. That the currency was stabilising was wrong, even as the deduction that the underlying economy was strengthening, was also very wrong.
Indeed, there were developments worth noting over the period and these included that the rate of currency depreciation significantly declined.
Whereas the Zimdollar was free-falling, starting at an exchange rate of about 1:3 to the US dollar as at February 2019, by June of 2020, the rate had dampened to about 1:25.
The rate of currency depreciation in 2019 and 2020 averaged about 85% per year but if one was to look at the final quarter of 2020, the depreciation had narrowed to under 1%.
The rate of inflation, which has been moving in line with the exchange rate, came off from a high of 823% in July 2020, to under 100% by mid-2021. This was seen as government’s magic by business operators, who ought to have imagined the situation better.
In this piece we explore what happened at respective times so that we are better able to understand what has gone wrong now, with both the exchange rate and inflation in Zimbabwe, as well as, what needs to be done by business operators.
As we write, inflation is creeping back to levels of above 100%, the exchange rate has gone past the 1:300 mark on the parallel market and the auction market depreciation is at its highest in as many quarterly periods.
There is expectation of an inevitable inflation and massive cutback in Gross Domestic Product(GDP) growth. Against this background, companies are now preparing to cut back their growth projections, but remain blinkered on what is at play beneath the economic surface of the country.
At the point in 2020 when inflation began to come down in August and the successive months, it was because exchange rate depreciation had halted.
Consumers are typically worried about price stability due to the dreadful impact of purchasing power erosion. A decline in economic growth averaging 10% per annum between 2019 and 2020 was largely due to the purchasing power decimation, which followed the currency devaluation.
So, with a “stabilising” inflation, consumers were able to at least retain their expenditure levels. With the revamp of the auction market, liquidity levels also improved, compared to 2020 levels, flows surged by over 200% per weekly session.
The immediate thing, which happened as part of the auction market redo, was to allow for a sharp devaluation of the Zimdollar thus reducing the premium between the auction market and the parallel market.
This came as a motivating factor to exporters, who saw their losses arising from exchange rate differentials, decline.
Subsequently flows to the market increased, hence driving the average weekly turnover levels up. Now the challenge with this approach as will likely be repeated in the next few weeks is that a market forcinggenuine devaluation is only allowed once and at this one time, the parallel market premium will be above 100%.
With a parallel market premium of 100%, it means the average exporter is losing about 25% of their earnings and this is a huge deterrent to trading on the market. So, outside of the forced liquidation funds, exporters will want to hold on to forex as much as they can.
Why does the Reserve Bank of Zimbabwe (RBZ) allow a more market-like devaluation to only happen once? In the first instance, it is not in RBZ’s best interest for the rate to move. If it moves it would rather move in favourable territory (appreciate) than the latter (devalue).
Devaluation of a currency comes with the consequence of inflation and all other disruptions to economic activity. Central banks all over the world favour a situation where their currency does not devalue.
However currencies in a typical world set-up, do move up and down, but within reasonable limits. The Zimbabwe situation is unique in that the movement of the currency has been one way in the adverse region and the levels of depreciation have been astonishing.
The RBZ and the central government have long been aware that the fundamentals that should anchor a currency are not in position and therefore instituted mechanism to control the rate.
This is largely pursued through the surrender purse. RBZ, by statute, is entitled to about 40% of overall forex receipts at a rate it sets through the auction market.
This arsenal, as we have repeatedly highlighted, gives RBZ leverage to control the supply side of the forex market. The demand side of the market is what it has failed to control because of indiscipline in monetary policy and government spending.
The mechanics of the auction market is important as we attempt to decipher what is wrong with the system or simply if government has failed and, if so, what industry should do.
It is clear that the old market isnot working. Attempts to redress the market through allowing interbank trades of negligible amounts at a free-floating rate will only further expose the RBZ.
If buyers of forex are willing to pay as much as ZW$250 for US$1 on the interbank, why not then on the auction market. It clearly demonstrates that the central bank is manipulating the auction rate. So, in essence, the stability which industry has been praising is an engineered one, modelled by the RBZ, but with the anchor of sound economic fundamentals. If one had pursued this logical deduction, the outlook would have indeed been posited as bleak.
Business operators need to be very concerned about the operating environment in Zimbabwe, especially ahead of the election season. The exchange rate could close the year in the region of 1000, if no remedial action is put in place and this refers to forex liquidity shore up through external loans or equivalent means.
The Treasury Bills tap, which has been reopened, is not going to be easily closed. Infact, it has a habit of becoming loose once opened for a defined period of time.
The country’s exports are swelling based on firm international prices, but the imports bill is not becoming any smaller. We are likely to see the highest import bill for the country ever this year and this means that the external position will remain precarious.
Companies will need to adopt hyperinflation measures as was the case two years back to survive the troubled waters. These measures are anchored on preservation of value.
This entails protecting earned value, largely reflected through the balance sheet. The major line item of concern is cash. Cash levels have to be kept low and this is done through increased stock levels or investments, either in hedging assets, such as stocks or real estate.
Other short-term investments may be useful, but the risk adjusted rate has to be kept in mind. For banks, lending activities have to be curtailed and largely concentrated on the short-term end. This is key in maintaining a healthy book and minimising non-performing loans.
For entities in production, forward pricing is key, to curtail losses and prudentially safeguard going concern.
Businesses need to make the same mistakes as in the past years, of believing that the trajectory has turned. It is ok to highlight instances where government has pursued good policies.But to be able to run companies well, operators have to appreciate the mechanics of the economic machine much more thoroughly.
- Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com