The Zimbabwean dollar, reintroduced in June after a 10-year hyperinflation forced hiatus, has taken heavy battering and weakened considerably against major currencies, including US dollar, because of significant surge in money supply and resultant high demand pressures, economists say.
The assertion by economists falls in line with what Reserve Bank of Zimbabwe (RBZ) Deputy Governor Kupukile Mlambo, said recently that the country was going through a drier period regarding foreign currency, after the end of the 2019 tobacco marketing season.
Zimbabwe’s tobacco marketing season opened in March and closed at the end of August with the country having sold 758,18 million kilogrammes worth US$526 million.
The value of the tobacco sold was, however, down from the US$737 million realised from the 753 million kgs sold last year. Other major earners of foreign currency are gold, platinum and chrome.
Being one of Zimbabwe’s single biggest foreign currency earners, the end of the tobacco season has worsened the shortage of foreign currency, increased demand pressures and opened floodgates for vagaries of (Treasury Bills) excess liquidity in the market.
Essentially, economists believe that the free roll rampage or unstable foreign exchange rate movement reflects excessive liquidity in the market against extreme high demand for and acute shortage of foreign currency to match a huge appetite for imports.
“The money supply has been extended dramatically by the Reserve Bank. We do not know exactly what they have done, but they have injected $5 billion to $6 billion and it has hit the market very hard,” said economist and former legislator Eddie Cross.
Money supply expanded 57 percent to $13 billion in the 12 months to May 2019, RBZ said in its 2019 midterm monetary policy statement review, which it attributes to expansion in foreign currency account deposits and movement of the exchange rate.
The latest statistics from the central bank, show that broad money supply is now $15 billion.
Cross said the dramatic increase in the domestic currency liquidity appeared to have happened over the last two months or so, with the funds set aside for the next farming season seen as significant part of the excessive liquidity exerting pressure on exchange rates.
Cross said to contain the problem, Zimbabwe should urgently find ways to plug leakages of the elusive foreign currency and put in place fresh mechanisms for an efficient interbank system.
The RBZ introduced an interbank market in February this year and floated the exchange rate, starting off at 2,5 RTGS dollars to the US dollar, but while trades have hit nearly US$1 billion since then, the market continues to fall short of what the economy needs.
The Zimbabwean dollar had firmed markedly and appeared to stabilise after Finance and Economic Development Minister Mthuli Ncube, scrapped the US dollar dominated multicurrency system adopted in February 2009, and replaced it with a mono-domestic currency.
In fact, the US dollar-RTGS dollar appreciated from about 1-11 before the ban of the multicurrency to 1-6,5 after June 24, 2019 with currency speculators momentarily disappearing.
The ban on multicurrency came as the economy threatened to self-redollarise amid a US dollar crunch and growing black market foreign premium pressures on prices, hence the galloping inflation.
A good number of Zimbabwean importers relied or continue to rely extensively on the black market for foreign currency, due to shortage on the formal market; they need to import essentials such as raw materials, equipment and any commodity for resale.
Prior to Government scrapping the multi-currency regime, there was on average a 60 percent disparity between the official or interbank market exchange rate and the parallel market rate, which appeared to widen by the day, especially on the black market.
While the formal and parallel market rate disparity has narrowed, to as little as 10 percent, it has recently shown little signs of stabilising, as had happened for several weeks after June 24.
Economist Brains Muchemwa, said that the acute depreciation of the domestic currency, coincided with the inputs preparation for the forthcoming agricultural season.
“Considering that the majority of the inputs, in particular fertilisers and chemicals are imported, the $2,8 billion fiscal budget for command agriculture for the 2019-2020 season has probably been hitting the market.
“And the subsequent pressure on the exchange rate has seen it heading northwards,” he said.
Exchange rate instability is blamed for playing the biggest part in driving high inflation, which hit 175,5 percent in June this year, from 5,39 percent in September last year.
Inflation started to pick up at a rapid pace as the Government embarked on reforms, under the Transitional Stabilisation Programme (TSP), including separation of foreign currency and RTGS accounts, liberalisation of foreign exchange trading and fuel procurement as well as the switch back to local currency.
And without adequate and reliable source of foreign currency to meet the needs of an import dependent economy, Zimbabwe has suffered from the destabilising effect of acute shortage of hard currency and excessive domestic currency devoid of market confidence.
The imports dependent economy, which manages a paltry UD$4 billion in foreign exchange earnings annually against imports of over US$6,5 billion, has suffered from western sanctions and investor unfriendly policies nearly two decades until end of 2017.
Economist John Robertson said the depreciating domestic currency was facing unrelenting pressures from the (high liquidity driven) demand-supply imbalances, as the central bank continued to insist that it allowed freedom to control most export revenue.
“This imposes constraints on the amount of foreign currency available to the importers, so many of them are forced to the black market.
“Government should insist that everyone pays the same exchange rate to buy foreign exchange, including the Reserve Bank.
“But it should insist that the Reserve Bank’s involvement in activities such as supplies of fuel, fertilizer, agriculture and electricity should be left entirely to private sector companies,” Robertson said.
The private sector entities, he added, should be able to purchase the foreign currency at a single market determined exchange rate and that no one should be accorded privilege to buy foreign exchange at a special rate so that they can resell at huge profits.
“The process is driving up inflation and profits made even, even add to the growth of money supply because these profits are made without any form of production taking place,” he said, adding Government should trust market forces and not interfere with or distort them.