Zimbabwe currency plunges as US dollar shortage escalates

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HARARE – Zimbabwe’s economy is on the verge of collapse as the dollar shortage intensifies. The Zimbabwe dollar has plunged to a new low against the US dollar and analysts warn the situation could get worse in the near term.

Most developing countries, especially those in Africa, are in danger as the Federal Reserve maintains a restrictive monetary policy. As we wrote here, the Federal Reserve decided to hike interest rates by 0.25%. The increase brought the official deposit rate to 5%, the highest level in more than a decade.

At the same time, the Fed announced that it will continue with its quantitative tightening (QT) process that is making US dollars rare. As a result, many developing countries are going through one of the worst cash crunches in the world.

In Kenya, banks are limiting access to US dollars, which is limiting the companies that focus on imports. The same story is happening in countries like Nigeria and Ghana.

Zimbabwe has also been hit harder even as demand for its commodities remains high. Data compiled by ZimPriceCheck shows that $1 is equivalent to 1,400 Zimbabwe dollars. The official auction rate places the rate at 915 but it is impossible for most people to access the rate. Three weeks ago, the rate stood at between $950 and $1,100.

The situation has become dire, pushing businesses to literally print their own cash coupons. According to the WSJ, many companies are preferring to write down these coupons because of the overall lack of cash, For example, instead of giving a buyer a $1 bill change, sellers are writing the amount in a paper with their business names. The buyer can then redeem the cash in their next purchases.

In Zimbabwe, the central bank and commercial banks import dollars from the US. But since the $1 notes are the most popular, it makes it uneconomical for these institutions to ship them in large quantities.

The new normal will be tough

The rapid devaluation of the Zimbabwe dollar (ZWD) is having major implications in the economy. For one, official inflation stands at 230%. Analysts believe that real inflation is much higher than that. As a result, the cost of fuel imports has jumped and shortages cannot be ruled out.

Unfortunately, the situation in Zimbabwe will get worse before getting better. For one, the Fed has insisted that it will maintain interest rates at an elevated level for a while. That action will increase demand for US dollars, which will hit poorer countries. The silver lining is that Zimbabwe is endowed by vast natural resources.

It has the biggest lithium ore deposits, which are attracting firms from China, US, and Europe. In December, the government announced a ban of lithium ore exports in a bid to boost local processing. The implication is that the action has led to over 2 million tons of ore being stockpiled. And globally, lithium prices have collapsed, as shown below. – Newzim