Zimbabwe exchange rate finds its range

With the Zimbabwe dollar strengthening for the second consecutive week, there are indications the local unit is close to finding its range.

Last week’s exchange rate gained 0,75 percent to $82,70 against the United States dollar.

Experts say a foreign exchange market will be in equilibrium when the supply of a currency matches demand.

According to the Reserve Bank of Zimbabwe (RBZ), the country requires US$100 million per month for industry and critical imports.

In the last forex auction, which was the 12th since the inaugural weekly auction on June 23, the central bank allocated over US$19 million, which, if maintained or increased going forward, means the auction system is catering for about 80 percent of the country’s foreign currency requirements.

But the allotments — representing the largest allocation made since the beginning of the market-determined auction system — met demand from bidders.

The foreign currency auction system, which has been a critical tool in the price discovery process since the re-introduction of the Zimbabwe dollar in June last year, has managed to remove private companies from the parallel market, where speculators are key players in determining rates.

Economist Mr Persistence Gwanyanya believes that the official rate is nearing equilibrium.

“It means we are quickly approaching the equilibrium exchange rate. We can only expect the parallel market rate to strengthen to this equilibrium rate, and the tight liquidity conditions currently obtaining in the market support this imperative.

“We do not expect the parallel market to be completely eliminated or rates to perfectly converge, but rather, the gap between the parallel and auction rates to narrow significantly, and it is comforting that this is happening,” he said.

“If this traction continues, by year-end we should expect convincing rate and price stability, which is necessary to drive inflation down.

“Stability is the precondition for investment and therefore production and growth.

“Suffice to mention that expansion of the supply side is necessary to sustain stability and, therefore, confidence in the economy.”

Following the latest auction, the Zimbabwe dollar strengthened against the greenback for the second week running, gaining 0,7 percent to $82,70 from the previous $83,32.

There is growing confidence in the auction system by companies.

Market watchers say a firming dollar is the culmination of concerted efforts by both monetary and fiscal authorities to curb money supply growth.

The authorities have largely maintained a tight leash on money supply.

Central bank statistics show that as at June 30, 2020, total money supply was $150 billion, of which $50 billion was Zimbabwe dollars, while the balance was in US dollars.

The move by monetary authorities last month to introduce the 20 percent foreign currency surrender policy on deposits from local transactions should boost supplies into the official market in the long run.

But the move is having its own near-term impact, especially in the uptick in money supply.

Reserve money, which represents the funds in circulation and deposits of commercial banks at the central bank, rose by $687 million over the week ending August 28, 2020, largely reflecting an increase of $789 million in banks’ deposits at the RBZ.

“The increase is attributable to the purchase of foreign exchange from the market by RBZ for the purposes of funding the auction,” explained monetary authorities.

“The increase in banks’ deposits at RBZ was partially offset by decreases in other deposits, required reserves and currency issued.”

However, expectations are that in the long term, prices will revert to normal pricing levels due to weakened demand and competition from fairly priced products by competitors.