THE free-fall of Zimbabwe’s local currency against the US dollar, which has driven a spate of wild price increases and fuelled rejection of the currency in certain pockets of the economy in recent weeks, may have bottomed out, economists say, with a number of key factors pointing to an imminent period of liquidity-induced stability.
By Golden Sibanda
This comes as it emerged that, this week, most banks did not have much liquidity to bid for more than a million US dollars on the central bank’s recently introduced wholesale auction, which sells forex to banks for onward sale to their clients.
Reports say the central bank has lifted about $200 billion from the market through its wholesale auction for banks, which has sold roughly US$25 million since inception two weeks ago.
The liquidity taken out of the market, observers say, constitutes a significant portion of the usable balances in the market.
Holders of large Zimbabwe dollar balances, likely contractors and suppliers to the government, often turned to the black market for foreign currency in order to preserve the value of their money, creating unbearable pressure on the fragile local unit.
But the market could be running dry of local currency liquidity, analysts said, aided in part by the rapid depreciation of the currency on the official market following its liberalisation.
A higher official exchange rate of the local currency, which stood at $6 351,5/US$1 as of yesterday, has increased the amount of domestic currency anyone seeking forex requires to buy US dollars.
Economic analysts believe the half-year statutory quarterly payments dates (QPDs), now around the corner, will further squeeze the market of the residual Zimbabwe dollar liquidity, which will strengthen the local unit.
Economist Farai Mutambanengwe said convergence between the Zimbabwe and US dollar, which authorities have struggled to achieve, looked more likely following the coterie of measures announced by both monetary and fiscal authorities recently. He said once that is achieved, it would increase the demand for local currency, leading to its appreciation.
“Its appreciation will result in people not changing their ZWL (Zimbabwe dollar) to USD at the first opportunity, meaning less demand for USD and therefore even further appreciation.
“So, ZWL will actually become the preferred currency, meaning de-dollarisation.”
Holding current measures constant, convergence will happen by mid-next month, the dominance of (the Zimbabwe dollar) by August, and practical de-dollarisation by the end of the year,” Mutambanengwe opined. He said this process would not be forced on anyone, “it will happen by choice”, adding the measures put in place by authorities recently, if adhered to, were enough to bring about convergence.”
If they want to speed up the pace, they simply need to allow ordinary folks to buy US$200 per week from bureaux (de change), by the end of next month you will see ZWL being the predominant currency of use (over 50 percent) and by end of the year it would be over 90 percent,” he added.
Floated at $2,5/US$1 in February 2019, the Zimbabwe dollar has continued its precipitous fall against the greenback due to what many observers believe is driven by excess liquidity in the market.
The Central bank has often been accused of printing local currency, which the apex bank however vehemently denies, while the Treasury has similarly been blamed for driving excess liquidity because of its use of the national budget, an unsuitable short-term instrument, to fund the construction of long-term infrastructure projects like roads and dams.
By its own admission, the Treasury said the large payments increased the velocity of the domestic currency money, although the fundamentals did not justify the volatility seen in the domestic currency.
The Zimbabwe dollar has continued to weaken since the attempted liberalisation of the exchange rate in 2019, after a 10-year year hiatus, which authorities had officially scrapped in 2009 following its rejection by the market amid rampaging inflation.
Because Zimbabwe resolved to reintroduce the domestic currency, amid a suffocating US dollar liquidity crunch, the reintroduction of the domestic currency has also suffered from warped public confidence due to high inflation, other than the negative effect of excess liquidity.
After opening the year at roughly $1 100 to the US dollar, the local currency is now largely traded at about $7 500/US$1 while in some instances it can be quoted around $8 000/US$1 on the parallel market.
While the local unit had been depreciating consistently over the last two to three months, driving prices quoted in the local currency through the roof, the series of policy interventions by the Government appeared to worsen the precipitous fall.
The script may be about to change though, at least according to the views of a number of economists.
Economist and MPC member Professor Ashok Chakravati said the measures authorities have rolled out since last month would certainly bring about the craved currency and price stability and improve demand for local currency.
“I think we are on the right track, and the policies, you will see, are going to have a significant impact in the next couple of weeks.
“Already, in two weeks we are beginning to see an impact, but just wait another two weeks and I think the market is going to be surprised by the impact this will have,” he said.
”There was a lot of liquidity in the market and these policies are squeezing that liquidity out of it. Just in the last two weeks, the foreign exchange auctions have taken almost $200 billion out of the market, and in a couple of weeks you will see another $200 billion going out, which is going to lead to a big squeeze, so let’s wait and see,” he said.
The policy interventions started with the Government in early May included allowing businesses to retain 100 percent of foreign currency proceeds from domestic sales to encourage the banking of such revenue.
Previously, businesses were compelled to liquidate or surrender 15 percent of such sales at the official exchange rate, requirement businesses regarded as an indirect tax given the disparity with the open market exchange rate.
Treasury also directed that all sovereign external debt payment obligations be moved from the Reserve Bank of Zimbabwe to the Ministry of Finance while the RBZ weekly auction would now sell a pre-announced envelope on a pure Dutch Auction system.
It also said short-term interest rates of up to six months would be hiked to eliminate speculative borrowing while long-term borrowing rates would be maintained at low levels. Further, announcing the measures Finance and Economic Development Minister Mthuli Ncube said all levies and charges for Government services would be paid in local currency to promote its wider use and demand.
Late last month, the Treasury announced more measures to encourage the use of the local dollar as opposed to the US dollar, as it continued efforts to boost the local unit and tame rising consumer inflation.
The measures included the introduction of a 1 percent tax on all foreign payments and that all customs duty be payable in local currency, with the exception of designated or luxury goods and where an importer opts to pay in foreign currency.
The central bank also responded by putting in place a number of monetary policy interventions to complement the policy measures introduced by the Treasury.
This followed the ad hoc meeting of the Monetary Policy Committee, which noted that the volatility of the local currency exchange rate emanated from both supply-side and demand-side factors.
To address the demand-side factors, the MPC resolved to increase the bank policy rate from 140 percent to 150 percent per annum in response to the recent increase in inflation.
With just US$5 million a week now available at the RBZ weekly auction, RBZ governor Dr John Mangudya said the MPC set bid limits of a minimum of US$1 500 and a maximum of US$50 000.
The auction will now be used largely as a price discovery mechanism.
Similarly, the committee proposed that the interbank maximum trading limits be reviewed upwards from US$100 000 to US$500 000, consistent with the current auction limits. The absence of a true and efficient foreign currency market in Zimbabwe has also often been cited among factors causing unending exchange rate volatility in the country.
In addition, the MPC resolved to increase the Medium-term Bank Accommodation interest rate from 70 to 75 percent per annum. Authorities also increased the statutory reserve requirements on local currency demand and call deposits from 10 to 15 percent, while maintaining savings and time deposit requirements at 5 percent.
Persistence Gwanyanya, a Harare economist and also a member of the MPC said the market was still bending down following the measures introduced by the Treasury and Reserve Bank.”
What we have seen in the last two weeks when the wholesale market for foreign currency started, is a significant mop up of the Zimbabwe dollar balances, which at that time were around $220 billion.”
I am sure they have gone down significantly if we assume that no further injection of Zimbabwe dollars happened during the (intervening) period.
“The US$15 million and US$20 million that have been sold to banks and bureaux de change mopped up a significant amount of Zimbabwe dollars, around $195 billion,” he said.
He said the market could be running dry of Zimbabwe dollar liquidity if no other avenue, such as banks extending loans and other public securities like bonds and Treasury Bills maturing, did not inject fresh liquidity.
Gwanyanya said during the last wholesale for foreign currency, banks were struggling to mobilise liquidity to present bids for the purchase of forex beyond US$1 million. Professor Gift Mugano, a Harare-based economist, said while measures introduced by the authorities represented the package of interventions that should have been implemented from the outset when Zimbabwe tried to liberalise the exchange rate regime in 2019, he doubted they would have much impact now given damage had already been done. – Business Weekly