Are we relapsing into volatility?

The Zimbabwe dollar has over the last two months witnessed renewed depreciation on the parallel market against the United States (US) dollar, stoking fears of potential relapse to volatility and a renewed inflation surge.

This comes as the parallel market rate (PMR) which appeared transfixed around $750/US$1 and $800/US$1 from August to early November, had since touched $1000/US$1.

Such a development is sure to invoke unpleasant memories of the volatility that rocked the Zimbabwe dollar until August this year, driving inflation to a 12-month high of 285 percent in August, having touched a two-year low of 50,1 percent in June last year.

In fact, at its height the depreciation of the Zimbabwe dollar saw inflation climb to a post-dollarisation record of 837,5 percent in July 2019, as prices rose unfettered.

Market watchers have attributed the latest resurgent volatility to various factors including growing excess liquidity, likely due to spending on farming programmes, and increased appetite for US dollars on the parallel market.

After the black market rate remained largely unchanged since August 2022, following interventions by the Treasury and the Reserve Bank of Zimbabwe (RBZ) to tame resurgent inflation that was being driven by currency depreciation, the open market rate has recently appeared to be on the move once more.

Notably, though, the movement has not been as rapid as seen when it previously caused runaway inflation, but looking at it with hindsight, the surge is substantial and a cause for concern.

After earlier widening to well over 50 percent, the margin between the official and PMR narrowed to just 15 percent by mid-September this year, giving hope for the desired convergence.

Stability in the exchange rate has steadied prices and saw a significant decline in monthly inflation, which retreated for more than four straight months up to November.

Zimbabwe’s annual consumer price inflation eased for the third straight month to a five-month low of 255 percent in November of 2022, from 268,8 percent in October.

Inflation has been falling since August this year following tight monetary measures implemented by the government and monetary authorities.

On a monthly basis, consumer prices increased by 1,8 percent, the least in 19 months, after a 3,2 percent rise in the previous month. Monthly inflation peaked at 37 percent in April this year.

But the recent upsurge in the PMR may likely upset the current price stability if it keeps going unchecked.

Economist Persistence Gwanyanta, who is also a member of the RBZ monetary policy committee, said the depreciation was only seasonal and tied to a period when the appetite for forex increases while the supply dips, which exerts pressure on the local currency.

“During this time of the year, we experience depreciation,…this depreciation is not as intense as it would have been had it not been for the measures implemented by the Reserve Bank and Treasury.

“We are at a time of the year when depreciation becomes cyclical. The cyclical nature of the economy dictates that the (domestic) currency depreciates.

“At this time of the year, the demand for forex normally would have peaked, obviously as we go towards the festive season, from November thereabouts.

“Obviously, this (increased demand for foreign currency) is due to the need to import agricultural inputs, (on the other hand) limited supply (of forex) would have slowed down due to the slow down in mining activities or production and obviously the tobacco (one of Zimbabwe largest export earners) season would have ended.

“So, normally during this period there is depreciation, but in our view, the pace of depreciation is going to be contained by tight monetary conditions currently obtaining in the economy.

The Zimbabwe dollar is in short supply and we do not expect any (serious) depreciation of the currency, going forward, we expect the monetary conditions to continue tightening. This is going to support stability going forward,” he said.

Gwanyanya also noted that the closure of the auction market on December 13, 2022, until January 8, 2022, contributed to an increased appetite for forex and had recently increased pressure on the parallel market rate.

Earlier, the Government rolled out a series of interventions among them a record bank policy rate hike from 80 to 200 percent as part of broad measures to stymie speculative borrowing.

The central bank also increased statutory reserves for banking institutions to limit the amount of liquidity available to banks, which may create excess liquidity and further upset the exchange rate.

Further, Treasury instituted the value for money audits to ensure fair pricing on all Government contracts after it was noted overpricing had been the source of excess liquidity that hurt the domestic currency.

Economist Professor Gift Mugano said it was highly likely that increased Zimbabwe dollar liquidity was the cause of the surge noted in the parallel market rate over the last couple of months.

“It goes back to that story of the Government procurement system where people (suppliers/contractors) get paid and they go to the black market (to buy foreign currency).

The second one is that we are in the festive season and people got paid salaries and bonuses, which are coming mostly in Zim dollars, giving people more leeway to spend.

“But also, you need to know that we have $1,9 trillion national budget for 2022. So, naturally, it must be spent between now and the end of this month.

“So, that spending, not only on procuring for agriculture but meeting obligations of various (Government departments) also pushes more money (liquidity) into the market.

“There is also what we call domestic export retention, where the Government takes 20 percent of the (forex) deposit in the bank and pay in RTGS.

“So, what happens is that the RBZ does not have reserves of RTGS to pay for the US dollars taken from the forex accounts, likewise the RBZ has no money set aside to liquidate 40 percent external export retention.

“As such, you would note that people will be sending money (from Diaspora) for the festive season, so there will be a lot of deposits of forex into retail businesses.

“So, there will be a lot of deposits into the banks and the central bank will be printing money to pay (for the US dollar deposits). As such, the money supply growth has been quite massive,” he said.

Professor Mugano said between September and October, there had been significant growth in money supply into the market of nearly $800 billion, a period that coincides with a renewed resurgence in the Zimbabwe dollar open market exchange rate movement.

Another Economist Eddie Cross said it was difficult to make sense of factors that have recently pushed the exchange rate higher, but noted that the “PMR rate is now approaching $1000/US$1”.-ebusinessweekly