Zimbabwe’s Maligned Dollar Catches Break on Central-Bank Action


HARARE (Bloomberg) – Zimbabwe’s measures to stabilize the country’s currency are finally paying off: the local dollar is heading for back-to-back months of gains for the first time since it was re-introduced 18 months ago.

This comes after the southern African nation’s central bank introduced weekly foreign-currency auctions and cracked down on mobile-money transactions, blamed by authorities for undermining the currency.

The Zimbabwe dollar slumped to 83.39 per U.S. dollar on August 26 after being re-introduced at around Z$3 in March last year. It strengthened 2.3% in September and has edged another 0.1% higher to Z$81.35 on Wednesday, according to central-bank data.

Central-bank measures appear to have stabilized Zimbabwe's dollar

The currency has also strengthened on the black market, where the premium for U.S. dollars, once more than 100%, has narrowed to between 15% and 20% as companies turn to official channels for foreign exchange.

A local website which tracks black-market rates, marketwatch.co.zw, put the street rate at Z$100 per U.S dollar on Wednesday, down from a peak of Z$120. In an Oct. 12 statement, the central bank’s monetary policy committee said stability was achieved after it alloted a combined $291 million at 16 foreign currency auctions since their introduction on June 23.

For the second week running, the Zimbabwe dollar was virtually unchanged against the US dollar at the weekly auction, shifting just one two hundreth of one percent to $81,3499 from last week’s $81,3458, a shift of just 0,41 of a Zimbabwean cent.

Since the middle of August, when the price discovery process of the early auctions reached a stable plateau, the weekly movement of the weighted average, which is now the official rate, has been trivial, exceeding one percent just once and that was a firming of the local currency.

The stable auction rate has been reflected in similar stability in the black market although recently the premium has been falling for cash-to-cash transactions as Zimbabweans and Zimbabwean businesses accept that the auction system has not only achieved a stable rate, but that all productive sectors can now access their foreign currency on the auctions at that stable rate.

The stable exchange rate has seen major stability in prices, effectively reducing monthly inflation to very low figures that are expected to drop even further.

The stability rests on the stable money supply of Zimbabwean dollars, a direct result of the fiscal and monetary discipline introduced by the Second Republic with the Government now living consistently on its tax receipts.

At yesterday’s auction the highest bidder on the main auction offered $87,1 (almost a $1 down from last week’s $88,07) as bidders edge closer to the average, while the lowest bid remained at $79. All valid bids were accepted. On the SMEs auction the highest offered remained at $86, while the lowest accepted bid was also unchanged at $79.

Big corporations were allocated a total of US$27,05 million, all they asked for and the third highest allotment, while smaller businesses received a total of US$1,74 million, again all they asked for and the second highest on record. The total foreign currency allocation was US$28,7 million marginally down from US$29,2 million last week but the drop was a slight cut in demand, since all bids that met housekeeping rules were accepted as all valid bids were within the band deemed acceptable.

The main auction saw 223 successful bidders allocated the US$27,05 million with another 15 bids disqualified. And on the SMEs board, 132 valid bidders received the total of US$1,74 million with another 14 disqualified. Bids for goods not on the priority list are rejected, as are bidders that have not sorted out the paperwork for past imports and exports. The number of rejected bids is also dropping weekly as almost all importers now routinely get their paperwork sorted out properly.

The foreign currency auction system-driven stability is expected to be the basis upon which the economy is expected to bounce in the coming year.

“In 2021, the economy is predicted to recover from a projected contraction of -4,5 percent in 2020 to a growth of 7,4 percent, driven by consumption (2, 6 percent) and investment (5, 8 percent) improvements,” said Finance and Economic Development Minister Mthuli Ncube last week.

“The recovery in consumption is mainly anchored on expected stabilisation of inflation through ongoing policy interventions which should aid restoration of purchasing power of consumers.”

And Zimbabwe’s productive sector is one of the biggest beneficiary of the current stability.

Initial projections for the manufacturing sector next year put estimated growth at 6,4 percent from a decline this year of 10,8 percent, basically a result of the Covid-19 lockdowns.

The Confederation of Zimbabwe Industries (CZI) has spoken on the significance of a performing product if sector.

“The outward shift in the Production Possibility Frontier means an increase in the productive potential of the economy and this outward shift is key for macroeconomic stability due to: increase in output which will reduce shortages, increased export earnings, increased employment which has been worsened affected by Covid19, and increase in revenue generation for Government which is crucial for the fulfilment public policy assignments.”

The productive sectors continue to the biggest beneficiaries of foreign currency allocations.

Yesterday, the raw materials segment accounted for the bulk of the allotments with US$10,57 million on the main auction and US$379 237 on the SMEs board.

Machinery and equipment came in second with US$4,07 million on the main and US$399 295 on the SMEs. And consumables came in third on the main auction at US$2,69 million. On the SMEs section, consumables took up US$484 901.

Meanwhile, Government has committed to fighting distortions in the market, which promote rent-seeking behaviour. In line with this move, the RBZ recently announced the launch of a contact centre to facilitate the reporting of exchange control violations.

Generally the violations are in free-fund transactions and the blackmarket since the auction system was set up to exclude speculation and abuse. Bidders have to back their bids with invoices, have to subtract their own forex holdings and only bid for the balance, and the auction funds flow into their nostro accounts and then straight out as their bankers pay the invoices submitted in the bids. A bid is, in effect, an instruction to a banker to buy the forex and pay the bill submitted.