World’s worst currency flips to best, hurting Zimbabwe’s economy

In most countries, the currency turning from the world’s worst to best in the space of a month would be good news.

Not in the largely dollarised economy of Zimbabwe, where the local dollar has recouped nearly half of its value against the US dollar after a 90 percent plunge this year. That’s hurting businesses selling goods using exorbitant exchange rates and betting the slide would continue.

It’s the latest market turmoil to hit Zimbabwe in a year that’s seen the currency devalued to stop triple-digit inflation and interest rates hiked to 150 percent, the world’s highest. The rebound, driven by new rules that require corporate taxes to be settled in the local currency, are seen easing inflation ahead of next month’s general elections.

The “appreciating environment” has led to businesses asking for “space” to be allowed to sell at the old exchange rate for a few months, but the government is not changing tack, said George Guvamatanga, the Secretary for Finance and Economic Development.

“The policies are there to stay,” said Guvamatanga in an interview. “We don’t do event-based policy. There was market failure in May, we used much bolder instruments. This is not election based.”

Black market exchange rates soared to as much as 10 000 Zimbabwe dollars per greenback in May as the local unit collapsed to a record low on the official market. The volatility fueled a surge in annual inflation to above 175% in June and sparked calls by the International Monetary Fund to allow the currency to trade freely.

Zimbabwe then liberalised the foreign-exchange market last month, hiked rates and made the tax changes. The reversal in the currency saw it trade officially at 4 876 per US dollar this week. Yet the reluctance by businesses to use the new rate is now raising the risk of goods rotting, as shoppers hold off from purchases, Guvamatanga said.

“People were going into supermarkets to buy goods as a way of dumping their Zimbabwe dollars — instead of getting 2 tubes of toothpaste, a person would buy the whole carton,” he said. “Zimbabweans savings were sitting in pantries.”

Banks initially suffered exchange-rate losses, though are now adjusting to the “new reality” of a stronger local dollar, said Lawrence Nyazema, president of the Bankers Association of Zimbabwe.

“The rate had run ahead of itself. It had over-depreciated,” he said in an interview, adding the association sees 5 000 Zimbabwe dollars against the greenback as fair value.

“It took us two weeks before banks were all operating at the same rate, but it will take much longer in the wider market.”-ebusinessweekly