UK think-tank sees new Zim dollar firming

The Zimbabwe dollar is expected to largely stabilise next year before it starts firming against the US dollar on the back of growing confidence in the domestic currency.

The local currency would fall to an average $16 against US dollar next year, but will be considerably weaker on the black market, a report by Economist Intelligence Unit (EIU) said.

It said the suppression of demand through limited access to the currency would continue to temper depreciation, which “we believe would be much more rapid otherwise”.

According to EIU, the domestic currency would firm to an average of $10 against the greenback in 2021, and to an average of $6,1 the following year, as inflation moderates, exports increase and the country realising more foreign direct investment.

Some economists say the “projections are quite reasonable since economic fundamentals are quite strong.”  The funds in the nostro accounts are at their highest level since 2009 at US$720 million, which suggests that Zimbabwe dollar should firm up.

And that monthly foreign exchange receipts of around US$500 million can support a stable exchange rate especially given the low quantum of local dollars in the market.

In February, Zimbabwe moved away from the fixed-rate regime after authorities introduced the interbank market to allow importers and exporters to trade the Zimbabwe dollar and other foreign currencies with the rate initially pegged at 2,5 against the US dollar. Since then, the value of the Zimbabwe dollar has dropped to 14,9 against the greenback.

The local currency is, however, weaker on the parallel market where it is trading around 20.

Economist Tapiwa Mashakada said the biggest challenge to the stabilisation of Zimbabwe dollar was hyperinflation of which “reducing inflation will be a miracle given the situation of the ground.”

“This alone makes the Economist Intelligence Unit assumptions very debatable,” said Mashakada, the former Minister of Economic Planning and Investment Promotion in the inclusive Government between 2009 and 2013.  While the think tank observed deepening economic crisis this and next year, it has projected the

“crisis” to abate, largely due to improved domestic energy, agriculture and mining production. This would improve Zimbabwe’s foreign reserves position, supporting the currency and moderating soaring inflation, said the think tank.

“We expect inflation to average 165,5 percent in 2020, after averaging an estimated 205,2 percent in 2019,” said EIU. Rapid inflation has been driven by sustained currency weakness, particularly on the parallel market, foreign-exchange shortages and the ongoing drought, which has severely reduced agricultural and hydro-power production. Inflation would however fall sharply in 2021, to 8,3 percent, owing to a strengthening of the currency and the high base of comparison.

With regards to gross domestic product, EIU says it would contract by nearly 13 percent next year following an estimated decline of 18 percent this year, largely due to drought that continues to weigh on agricultural output and energy production as well as other ongoing currency and liquidity crisis hampering the economy.

“In 2021-24 growth will steadily increase as better weather conditions facilitate growth in agriculture and a return to domestic hydro-power production, allowing mining activity to pick up.”

However, continued weakness of tobacco prices was likely to affect investment in the agricultural sector over the medium term. Industrial sectors would register firmer growth, albeit from a very low base, as monetary conditions improve later in the forecast period. International interest in the gold sector would be constrained by a difficult operating environment, although it will attract investment primarily from China and Russia.

Source – ebusiness