When will it end? How will it end? The exchange rate continues to fall, although it is not in free fall after the corrections of last month, but at some stage the market must run out of liquidity and something a lot closer to stability will have to arise.
The question is what will that rate be and when will the near stability arise.
It is obvious, from what the Reserve Bank of Zimbabwe has done in the last five weeks and from what Minister of Finance and Economic Development Mthuli Ncube said at the end of last month after a Cabinet meeting that the interbank rate is now considered the official rate and that this rate and the auction rate need to be in alignment.
This is fair enough.
When the auctions were introduced the opportunity was taken from the free fall in the black market in the middle of 2020 to introduce a more realistic exchange rate, one that after everything settled down after the first month or two that was thought by authorities to be on the high side when considering the fundamentals but not much on the high side.
That calculation of where it should be was no doubt made after looking at the fundamentals: the money supply, the level of required imports, other required foreign currency outgoings, the possible level of desired imports, the level of exports, and the inflows of foreign currency outside the export trade, mainly the diaspora remittances although there were some incoming investments and lines of credit.
And there was a high level of stability in the official rates, and even a fair level of stability in the premium charged on the black market. So far so good.
However a triple set of stresses arose: one the result of administrative decisions, one the result of greed within markets and one, the most fundamental, systematic arising from the division of foreign currency into three markets that were not well connected.
The administrative decisions revolved around stabilising the auction rate in light of the calculations that it was close, if a little above, what the fundamentals suggested.
And the Reserve Bank did produce a fairly stable auction rate.
But the problem was that to do this the allocations ran above the available currency and the backlog was created.
Besides some cheating, and a fair amount of cheating was eventually reported, the supposition that with a realistic rate the retained export earnings would start entering the market, either in direct sales or through the banks accessing nostro deposits for onlending, did not happen, or at least not significantly.
Efforts to get the banks to be thinking about this were not successful.
After allowing the auction rate to drift up steadily, the willing-seller willing buyer interbank market was launched at the beginning of April and then on May 17 the auction rate was brought into alignment with that interbank rate, in a sudden jump.
The rate has continued to decline. The interbank midrate was $284 on that day with a $258,5 auction rate.
On Tuesday the interbank had reached $333,45 and the auction rate $338,49, only about 1,49 percent apart so the auction average was well with the buy-ask margin of the interbank rate and the interbank midrate was well within the narrowing gap between top and minimum successful bids on the auction.
But the fact remains that the interbank rate, the standard setter, had declined 17 percent in a month. And the question remains as to when it is likely to settle down to small figures in monthly movement if this is to be the roughly stable rate.
The second problem is the greed in some markets and the assumption that the black market is the real market. This is the crunch. The black market insists on maintaining a fairly steep premium on the interbank rate.
This market is open to manipulation and is manipulated, but tragically many feel that there should be a large premium as a natural force.
However the percentage premium is now fairly stable, which is a sign that stability is possible and that the black market rates are being driven by the interbank rate, rather than the other way round. That is a major gain, but there is still the dog chasing its tail, as interbank sellers reckon they should be getting close to black market and the black market manipulating the continued premium.
The attack on liquidity comes in here. For more than three years the Reserve Bank concentrated exclusively on the reserve money supply in its targeting.
However towards the end of last year it started taking into account broad money supply, M3, a measure that many central banks had stopped monitoring daily with all exchange rates globally now floating.
And this showed the true picture in Zimbabwe.
Almost all the increase in money supply in Zimbabwe was found outside the narrow definition and was largely generated within the banking system.
It was all very well for banks to have a low percentage of loans compared to deposits but when the foreign currency accounts are totalled separately from the local currency accounts we find almost zilch lending from the FCA pile and almost 100 percent from the local currency.
We also have the money supply growing fast because a falling exchange rate for the local currency drives up the value of the nostro accounts.
The attack on liquidity on May 7 has cramped the growth, although finding that 12 out of the 16 banks were ignoring or circumventing the liquidity clampdown, at least for favoured customers, shows the extent of the problem and the deep-seated gap between the conceptual universes of the authorities and a large swathe of the private sector.
But in the end the clampdown should work, but with the danger of a partial recession as consumer spending falls in real terms.
The salaried workforce is suffering severely at present with increases slow and small compared to the price rises seen in the last two or three months. Already we have Delta reporting lower volumes as optional spending decreases.
Which brings in the third factor that affects the calculations on the fundamentals.
We in effect have our foreign currency in three separate markets, and without as much linkage as there should be.
There is the official market, largely the surrendered exports earnings but including some other inflows, in particular the IMF one-off grant and some other lines of credit.
The foreign currency tax receipts must be a significant inflow, at least giving the Government its own sources of foreign currency outside the official markets.
We have the nostro account holdings, the retained export earnings.
These are now huge reserves. And they are just sitting there.
Net exporters would rather hold their money in these accounts than sell them or use them.
And then we have the free funds fed from a variety of sources, including the diaspora remittances but also a fair percentage of farmer earnings.
And one major industry, the petroleum industry, largely operates within the free-funds pool.
This is the pool that fuels the black market, with both sellers and buyers.
The links between the three markets are tenuous.
There was supposed to be a strong link between the FCA deposits and the official market as holders of nostro accounts sold off foreign currency to fund their local currency expenditure. That does not happen much, although having the proper interbank market has seen some movement.
But that movement needs to be greater; everyone agrees on that. But this requires low inflation, which in turn requires greater stability in exchange rates and that requires low inflation, so we have another dog chasing its tail.
These two tail chasing operations, the one between the interbank and black market rates and the one between inflation and the interbank rate now need to be addressed, and addressed by market forces rather than some fiat by the authorities.
The liquidity crunch will be a major factor, but that needs ever tighter separation between liquidity needed for business and liquidity needed for speculation.
The process of splitting the local currency has started but obviously needs continual upgrading so the black market is starved of buyers without generating a serious recession.
Even other attacks on the black market should switch to hammering buyers, not sellers, now that there is a rational official interbank market without distortions, as a fair alternative.
If buyer pressure reduces then the rate must come down and then sellers will start switching.
Attacking the sellers into the black market was never going to work, so the latest move to starve it of buyers is the only way left and, in theory it should work.
Once the premium starts falling then the interbank link between the retained export earnings and the official pool can become more active and we can start moving into a more normal economy.