Forex retentions to keep pressure on currency in 2024

Analysts and researchers say pressure on the local currency will continue in 2024 as government and the Reserve Bank of Zimbabwe need to increase the currency in circulation to cover export liquidations.

The RBZ in October 2023, adjusted its retention policy to a flat fee of 75 percent from different ratios ranging from 70 percent to 85 percent, prompting research firms to say this means increased local currency in circulation.

In their 2024 economic outlook, Morgan and Co, said the local currency will continue to face pressure from foreign currency retention resulting in increased currency depreciation.

“We opine that the expected rise in the trade deficit in 2024 prompted the central bank to lower foreign currency retention back to 75 percent with the balance being settled in Zimdollar at the prevailing official rate. The move holds several implications, chief of them being a further depreciation of the Zimdollar and Zimdollar inflationary pressures,” Morgan and Co said in their 2024 economic outlook.

The Zimbabwe dollar’s depreciation has significantly slowed down because of a tight hold by monetary authorities and additional Zimdollar into the economy could push the parallel market higher in 2024. Morgan and Co also added that overdue payments to farmers could add to the currency pressure.

“We opine that the retention paves way for ZiG’s (Zimbabwe’s gold-backed digital token) forced penetration into the economy. Given the fiscal and monetary authorities’ focus on stability, it is possible that ZiG will feature as a third currency in foreign currency retention.

“Exporters could begin receiving ZiG in the Zimdollar’s place, albeit slowly, in an effort to wean the country from the US Dollar while containing the parallel market rate,” the report read.

IH Securities in a monthly snapshot said; “The net effect of a standardised retention measure is to increase foreign exchange resources available to the bank and government to meet foreign exchange requirements for the settlement of national and international obligations.

“In our view, this inadvertently increases the Zimbabwe dollar burden required to liquidate the remaining 25 percent of foreign currency and potentially implies increased Zimdollar liquidity in the economy.”

Some exporters were enjoying a higher export retention threshold, putting less pressure on the need to find local currency to liquidate the remaining balance of the export proceeds. However, now that all exporters are set to receive a standardised rate, this increases the need for more local currency to liquidate the remaining foreign currency.

IH Securities said there was a marked growth in Zimdollar liquidity in the market that it expected would continue into the year, exerting persistent pressure on the exchange rates.

Gladys Mutsopotsi-Shumbambiri, an economist with extensive experience in monetary policy, emphasises the importance of understanding the dynamics at play.

“Lower forex retentions mean reduced inflows of foreign currency into the economy. This places the burden on the RBZ to source Zimdollar to fulfill its obligations, potentially leading to increased money supply and inflationary pressures,” she explained.

Dr Prosper Chitambara, a renowned economist specialising in development economics, echoes these concerns, highlighting the delicate balance that must be maintained.

“The challenge lies in ensuring a sufficient supply of Zimdollar to meet demand without resorting to excessive money printing, which could exacerbate inflationary trends,” he remarked.

Wadzanai Vambe, an economic analyst with expertise in financial markets, underscores the need for proactive measures to mitigate the impact.

“Lower forex retentions necessitate strategic interventions to boost domestic production and export earnings, thereby reducing reliance on imports and foreign currency inflows,” she suggested.

“This approach can help alleviate pressure on the RBZ and support the stability of the ZWL.”

The repercussions of lower forex retentions extend beyond the realm of monetary policy, permeating various sectors of the economy.

A decrease in the availability of foreign currency can hinder import-dependent industries, leading to supply shortages and price hikes. Furthermore, the depreciation of the Zimdollar against major currencies can erode purchasing power and diminish consumer confidence.

In response to these anticipated challenges, policymakers must adopt a multifaceted approach that addresses both short-term exigencies and long-term structural reforms.

Enhancing export competitiveness, fostering a conducive business environment and promoting fiscal discipline are integral components of a comprehensive strategy to bolster the resilience of the Zimdollar.

Additionally, collaboration with international partners and multilateral institutions can facilitate access to external financing and technical expertise, augmenting Zimbabwe’s capacity to navigate turbulent economic waters.-ebusinessweekly