Economic instability persists as Zimdollar loses ground

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Government measures that had stabilised the economy in recent past months have failed to sustain as overall the policies have not been as effective as the authorities would have wanted, analysts have said.

This comes as the Zimbabwe dollar has lost ground against the USD within a week on the parallel market, falling to approximately US$1: ZWL$2000.

On the Reserve Bank of Zimbabwe (RBZ) weekly foreign currency auction market, the ZWL is changing hands at US$1:ZWL1 026. Government last year introduced a raft of measures to tame runaway inflation and exchange rate and the economy, until recently, witnessed stability while prices for most basic goods dropped. At the same time, the official and parallel exchange rates moved nearer to convergence.

Part of the Government’s measures were aimed at instilling discipline and curbing speculative behaviour, targeting the exchange rate and the broader macro-economy.

In addition, the central bank on its part hiked the bank policy rates from 80 percent to 200 percent aimed at reducing speculative borrowing and stabilising the exchange rate. Moreover, the central bank introduced gold coins as an alternative investment, helping to mop up excess liquidity in the market.

However, the latest parallel market volatility comes a few days after the central bank governor, Dr John Mangudya hinted on introducing a gold-backed digital currency to fight inflation and value loss in the local currency.

Economist, Professor Gift Mugano, told Business Weekly the current trend was a reflection of Government policies’ failure to hold on to the stabilisation.

“From the monetary policy stance, the RBZ is increasing money supply or excessive liquidity through the domestic foreign currency deposit retention. When you deposit the money into a bank, they retain 15 percent of the forex and when they liquidate that, they print money to pay that component of the 15 percent and that increases money supply,” he said. Prof Mugano said the economy was rather fully dollarised hence authorities should adopt the 100 percent retention and remove the 25 percent retention on exports.

“Excess liquidity is also being created by the Treasury. Last year they blacklisted some companies which were accused of participation on the parallel market, which is a confirmation of Treasury’s involvement. The civil servant salary budget of $2,2 billion also finds its way on the parallel market as the economy has dollarised,” said Prof Mgano.

The Confederation of Zimbabwe Industries (CZI) recently said the emerging instability of the local currency as reflected by high depreciation of the exchange rate in March 2023 will also be reflected in the degree of dollarisation of the economy.

The current exchange rate volatility has had significant knock-on effects on the retail sector as well as disposable incomes.

Investment analyst, Rufaro Hozheri, said Government policies have had periods of stability for instance during the last quarter of 2021 and the 2nd and 3rd quarter of 2022. “… but overall the policies have not been as effective as the authorities wanted,” he said.

Hozheri said electioneering was always an X-factor in terms of expenditure hence as the country prepares for elections, there were going to be likely scenarios of expansionary policies.

Another investment analyst, Batanai Matsika said exchange rate volatility also relates to liquidity trends, especially USD inflows which are usually up and down.

“There are times such as the tobacco selling season and sales of gold and other minerals, at the same time there are expenditure trends and these create a lot of volatility in terms of the exchange rate.

“Therefore, there is need to smoothen out the liquidity flows especially around forex so that we do not get these surprises,” he said.

Matsika said generally towards elections, economic agencies take caution hence that approach could mean taking positions in stable currencies such as the USD. “So there will be excess demand for USD because in Zimbabwe, the USD is considered a safe haven asset hence people would hold on and there will be excess demand for USD,” he said.

Matsika also indicated the proposed digital currency by the central bank is a good idea but it has to have appropriate adoption.

“Adoption is very difficult from the Central banks, once you say the digital currency is backed and there is no proof, that creates an issue of lack of confidence and it takes time for people to adopt that currency,” he said.

Economist Vince Musewe said the main reason for the hike in USD parallel market rates is a shortage of USD cash in the market and those with USD cash are demanding a higher premium.

“Sadly, this fuels inflationary pressures and the uncertainties of the pre-election period, further worsening the situation as those with USD reserves would rather hold onto them,” he said.

He added, “We have seen interest rates being used to stem speculative borrowings and this has worked and the gold coins as an alternative store of value have done well.

“We are in a period with lots of uncertainties both globally and locally and the USD continues to be a safe haven for most.

“This continues to strengthen its appeal worldwide, Zimbabwe included, and that is not about to change any time soon,” he said.

According to Hozheri, hiking interest rates deterred speculative borrowing but at the same time hurt genuine borrowers and even the banks. In the end, he said, the economy skewed more towards US-dollar trading hence hiking the policy rate will not have effect because of the insignificant ZWL economy. – Business Weekly