eBusiness Weekly
Tapiwanashe Mangwiro
Zimbabwe has been all about the parallel market exchange rate talk in the past three months after the local currency depreciated sharply against the greenback due to excess liquidity in the market.
Economic analysts believe the Reserve Bank of Zimbabwe (RBZ)’s policies are to blame for the domestic unit’s downslide.
The Government measures that had stabilised the economy since mid last year have failed to sustain, as overall, the policies were inadequate to anchor durable stability, analysts say.
On the official market the local currency has lost 59,40 percent of its value year to date, after falling from $671.45/US$1 on January 1, 2023 to $1 070.31/US$1.
Over the past twelve months, the Zimbabwe dollar has slid from $150,22 on May 4, 2022, representing a 612,49 percent depreciation against the US dollar.
On the parallel market, the unit lost 33,33 percent in March 2023 alone after plunging from $1 200/US$1 to $1 600/US$1 to the dollar and 37,5 percent in April to $2 200/US41. In the year to date, the Zimbabwe dollar has lost 144 percent of its value from $900/US$1 to the current $2 200/US$1 to the dollar.
Economist Dr Prosper Chitambara said, the parallel movement is a testament that both the Treasury and the central bank are making payments to their respective clients.
“Treasury is exchanging its US dollars with local currency in order to pay contractors and various suppliers, and in return the Reserve bank has to print money in order to match the US dollar deposits in order for it to pay the said contractors,” he said.
Dr Chitambara went on and said the Central Bank on the other hand is also printing its own money to match the export receipts leading to the cycle where the recipients of the local currency are now willing to purchase the greenback at any cost in order to beat the rate movements.
Investment analyst Tafara Mtutu said Zimbabwe was experiencing a rise in prices because of exchange rate movements in recent weeks and the parallel rate was being driven by money printing in order to meet forex retention ratios.
“From the monetary policy stance, the RBZ is increasing money supply or excessive liquidity through the domestic foreign currency retention.
“When you deposit the money into a bank, they retain 15 percent of the forex and when they liquidate that, they print money to pay that component of the 15 percent and that increases money supply,” he said.
Mtutu added that as a result prices have moved upwards, reflecting the sharp exchange rate movements in recent weeks, at a time prices in Zimbabwe are indexed to the US dollar.
Another economist Tinevimbo Shava said the exchange rate volatility related to the liquidity situation in the economy, especially given US dollar inflows always fluctuate.
“There are times such as the tobacco selling season and sales of gold and other minerals, at the same time there are expenditure trends and these create a lot of volatility in terms of the exchange rate. And we are in those times.
“We have seen this trend for four years now since 2020 and we will see a smoothing out in the third and fourth quarter. The RBZ needs to work out a lasting solution to this issue because it will be their achilles heel.”
The Government last year introduced a raft of measures to tame runaway inflation and exchange rate volatility and the economy until recently witnessed stability while prices of most basic goods dropped.
Similarly, the official and parallel exchange rates moved closer to convergence.
Part of the Government’s measures were aimed at instilling discipline and curbing speculative behaviour, targeting the exchange rate and the broader macro-economy.
In addition, the central bank on its part hiked the bank policy rate from 80 percent to 200 percent to reduce speculative borrowing and stabilising the exchange rate.
Moreover, the central bank introduced gold coins as an alternative investment, helping to mop up excess liquidity in the market.
All this has failed to hold as the country has seen an increase in the parallel rate premium and does not seem to be stopping anytime soon this quarter.
Investment analyst Namatai Maeresera said generally towards elections, economic agencies take caution, hence that approach could mean taking positions in stable currencies such as the US dollar.
“So, there will be excess demand for US dollars because in Zimbabwe, the US dollar is considered a safe haven asset hence people would hold on and there will be excess demand for US dollar,” he said.
However, Eddie Cross has disputed that the election fever has already gripped the nation as he said the mood is still lackluster.
“The country is not yet in election mode and credit to the authorities for delaying proclaiming the day of voting as it has kept the country in a business mood. As for the parallel rate, Government has been paying its contractors as well as tobacco farmers hence a bigger appetite to preserve value leading to the depreciation of the local currency,” Cross added.
The citizen has been left to suffer in the short term as incomes are slow to adjust to the movements, hence more people being driven into poverty in the period.
