Who moved exchange rate?

The Zimbabwe dollar lost ground by at least 20 percent on the widely used parallel market in a very short space of time amid high speculation that huge amount of local dollars was released into the market — raising fears the local currency is heading to extinction if the trend is not reversed.

Two weeks ago, the weakening local currency was trading between $1 250 and $1 300 to the greenback but the exchange rate has since depreciated to between $1 400 and $1 600 on the parallel market.

Since the beginning of the year, the local currency has lost between 40 and 60 percent and has seen its use in economic transactions drop to less than 20 percent according to findings of the eighth round of the Rapid Poverty, Income, Consumption and Expenditure Surveys (Pices).

The results covered the period July 20 to August 17, 2022 and the ratio is likely to have grown in favour of US dollar use as the exchange rate continues to depreciate.

A street dealer, who spoke to this publication said he was paying as much as $1 550 and offloading at between $1 600 and $1 700.

“I am not sure what’s really driving the exchange rate, but in some of our groups, dealers are paying as much as $1 650,” said the money changer.

Some shops are, however, still using rates below $1 200, according to a snap survey conducted by Business Weekly.

The latest downward trajectory is, however, alarming as it has been steep in a very short space of time.

Even more worrying is that authorities seem little concerned describing the economic environment as calm and largely positive. In his presentation, at a book launch last Saturday, the Director Economic Research Division at the Reserve Bank of Zimbabwe, Dr Nebson Mupunga, said the exchange rate is depreciating as a result of the store of value aspect where people are converting the local currency into foreign currency. However, despite the apparent shift and exchange rate depreciation, Mupunga believes the RBZ is doing a good job.

“The measures that we have taken since last year are actually helping the country. We are seeing prices significantly going down. In other words, we have put inflation firmly under control since September 2022. Reflecting these efforts, we have seen month-on-month inflation declining from a peak of 30,6 percent in June 2022 to a negative 1,6 percent in February 2023 and also in march when inflation was 0,1 percent.

“What it tells us is that prices have been firmly under control because I think for a long time we have not recorded inflation in the negative territory.

“With the measures that we are taking, measures that we are implementing, we see inflation falling underpinned by a tighter monetary policy and also the bumper harvest we are expecting this year because of goods rains,” he said.

Mupunga added that the central bank is committed to staying the course of a tight monetary policy “to preserve stability.”

“We are also taking measures to smoothen exchange rate movements through the auction system we are running on a weekly basis. We are also supporting savings in local currency through instruments that compensate investors against exchange rate depreciation for example the gold coins.”
Mupunga is not alone in thinking that the apex bank has done a good job in managing exchange rate stability.

Straight from a Monetary Policy Committee (MPC) meeting on Tuesday, Committee member Persistence Gwanyanya, seemed to be in denial with regard to the exchange rate movement in recent weeks.

“So far calmness in the economy as we approach elections gives us hope of a better year. The plebiscite is unlikely to spin the market out of control as before,” said Gwanyanya, through his Twitter handle @percyconsult.

The calmness is, however, contrary to what is on the ground where the exchange rate has decimated local currency earnings and values.

Part of Gwanyanya’s tweet, however, admitted all is not well.

“Whilst noting the recent currency volatilities we take the view that this is temporary. We take the view despite the recent currency depreciation velocity of ZWL is still low meaning there has not been market panic.”

Interestingly the MPC Statement released yesterday evening completely ignored the recent volatility in the exchange rate. With regard to exchange rate dynamics, the MPC resolved to “liberalise the foreign exchange market to enhance the operation of the Willing-Buyer Willing-Seller market by increasing and standardising the trading margins for authorised dealers from the current 5 percent to 10 percent, consistent with the margin applicable to bureau de change and retailers; and maintaining the maximum amount per transaction at US$100 000.

However, economic analyst Farai Mutambanengwe, said the said liberalisation will not do much to stabilise the exchange rate.

“No it will not. What needs to be done is to completely liberalise the WBWS market. The official exchange rate is now at a 36 percent discount to the market rate, and factoring in the 10 percent margin still leaves the official exchange rate at a 29 percent discount to the market rate.

“We are back at those levels where it is profitable for people to borrow ZWL and exploit the arbitrage gap, so that is what is most likely happening, hence the rapid depreciation of the ZWL.”

But what is really moving the exchange rate?

Gwanyanya gave a hint on what could be the major cause of exchange rate depreciation.
“However, payments of suppliers and contractors by Treasury within agreed timeframes is equally important for the proper functioning of the economy,” he tweeted.

“Balancing these two imperatives is Treasury’s biggest headache today. The structural nature of our economy typified by a concentration of market power in the hands of a few makes it very difficult to deal with currency stability,” said Gwanyanya.

Business Weekly has it on good authority that huge amounts paid by Treasury could have led to the instability.

In March, Treasury made payments of more than $100 billion, sources say. A 100 percent increase in civil servants’’ salaries could have added to the fire.

Economist Eddie Cross, however, believes the problem lies with the central bank which he said is “printing money”.

“This is in two main forms — they print local currency electronically for the purchase of gold and foreign exchange.”

This amounts to close to $16 billion per month according to Cross. Tobacco farmers are also paid in ZWL for their surrender requirements and this adds more billions into the system where even government requires US dollar payments.

“Then they are buying hard currency that is being held by exporters and local companies trading in USD and this costs them about 23 percent of all forex earnings. These transactions require printing of many billions of dollars every month,” Cross said.

He said the other reason why the rate continues to depreciate is “the complete lack of confidence in the local currency.”

“So people want to spend it as fast as possible and also convert it into a hard currency whenever possible.”

Cross said if we need our own currency we must “stop destroying it.”

“The Government should be collecting all taxes in local currency and should be paying all creditors in the same currency. By demanding USD for services, the State is consolidating the demise of the local dollar.

We should abandon exchange control, close down the auction and make the local dollar the only legal means to settle local costs,” he said.

Another economist with a local bank, but can only speak off the record, said what is urgently needed to rescue the local currency is the reduction in interest rates to 60 percent and put in place a properly functioning interbank market for foreign exchange.-ebusinessweekly