DESPITE continued efforts to stabilise the Zimbabwe dollar (ZWL) exchange rate, the aftermath of the 2023 general elections has seen a surge in speculative activities that are driving the depreciation of the local currency. It is, therefore, imperative to assess the extent to which these activities are detrimental to currency and overall economic stability. As political tensions and anxieties surrounding the election outcomes heighten, speculators exploit the volatility from the prevailing uncertainty to make arbitrage gains from the currency and financial markets. This was reflected in the oscillatory performance on Zimbabwe Stock Exchange (ZSE) and Victoria Falls Securities Exchange (VFEX) from mid-August to early September.
However, on the currency market the trajectory appears to be lasting longer than anticipated, as the parallel exchange continues to sharply plummet while the official rate remains relatively stable, a reflection of speculative trading in informal sector while the regulated economy remains stable. This is alarming in an economy that is more than 80% informal.
The ZWL has depreciated by a cumulative -11,4% on the parallel market month-on-month, and -2,3% on the interbank market. In the second quarter of this year, the central bank in conjunction with the Ministry of Finance introduced measures meant to curb inflation and exchange rate depreciation.
These measures included the tightening of the monetary policy to reduce supply of the ZWL, which would subsequently reduce demand for alternative currencies, contextually the USD. For the first time this year, the ZWL appreciated against the USD following the introduction of these measures, and this trend was sustained for over two-months. However, while these measures are still in place, the ZWL has started depreciating at an accelerating pace against the USD as highlighted above. Speculative currency trading is one key driver behind the recent depreciation of the ZWL. Speculators engage in currency transactions with the aim of profiting from volatility. By rapidly buying and selling currencies, speculators exacerbate the volatility of the ZWL, and this has seen the exchange rate on the parallel market increasingly losing ground.
Determined to avoid exchange losses amid uncertainty, individuals and businesses turn to the black market to acquire more of the hard currency as a safe haven. As demand for the hard currency on the black market rises, the ZWL's value weakens further. Therefore, the negative currency trajectory is fuelled by increased demand for the hard currency, amid an unchanged supply of the ZWL. The upside of this development is that in due time, demand and supply factors will even the disparity as supply of ZWL will again fail to meet the increased demand of the USD, given the central bank has maintained its position on money supply. It is, therefore, a short-lived bear-run.
As a reflection of post-election speculation, capital flight from Zimbabwe notably notched up. This was indicated by heightened sell-offs in stockstowards the end of August and early September, with foreign outflows registering an exponential growth over the short-period. Following the tightly contested presidential election and a ‘disputed’ outcome, investors became increasingly wary of economic stability, prompting them to withdraw investments (both on financial and non-financial markets) and park their funds in more stable currencies elsewhere. This capital flight also partially weakened the ZWL as the country faced a declining influx of foreign exchange. Recognising the detrimental effects of post-election speculative activities on the ZWL, the government announced its intention to sustain existing monetary policy measures along with measures implemented by the Ministry of Finance, following the re-election of members in the Finance Ministry. This is meant to restore confidence in the local currency as was witnessed during the pre-election period. However, addressing political uncertainty and creating a more stable economic environment through sound fiscal policies will also help stem the tide of speculative activities and encourage confidence in the ZWL.
- Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma_
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