eBusiness Weekly
Misheck Ugaro
The local currency unit, Zimbabwe Dollar (ZW$), has come under heavy attack in the last week with the parallel market rate sliding heavily from $48:US$1 to $55:USD1 inside a week. It is fast approaching the ZW60 level and it is possible to close the third week having breached the $65 level.
Once that happens, it will be one way to the $100 level before the end of May. Meanwhile, the official interbank market remains anchored at $25:US$1. Many questions arise as to the thinking guiding the authorities in terms of policy direction.
Apart from this environment penalising exporters and benefiting speculators, the efficacy of a pegged exchange rate has always been proved to fail and memories of the parity fallacy of $1:US$1 are still very fresh.
Progress had been achieved when for sometime in the last quarter of 2019 policy seemed to be headed the right direction with the premium between the interbank and parallel rates narrowing.
The two rates had almost converged and hovered around parity with the South African Rand with statements from both private players and the authorities seeming to indicate this as always having been the targeted level.
This thinking was supported by steps taken including the setting up of a Monetary Policy Committee (MPC), The Currency Stabilisation Task Force and the introduction of the Reuters trading system to buttress the willing seller willing buyer principle and many other public postures.
These actions began to create some confidence although players continued to call for an ultimate freeing of the market. At some stage facts on the ground seemed to indicate the economy was headed in this direction with some MPC statements indicating an intention of moving towards a full liberalization of the exchange rate from the managed interbank rate.
While legal tender was still exclusively the local currency unit, facts on the ground called for an acknowledgement of a dollarisation of the economy despite the public denials by the authorities. The economy auto self-dollarised despite all the denials.
In a baffling move, within weeks of the announcement of the currency stabilization task force, the authorities reversed a gear and reestablished a pegged interbank exchange rate at ZW$25:US$1 and reversed the implementation of the Reuters trading system that had been geared at achieving market transparency and efficiency.
From that stage on the parallel rate started sliding away reaching ZW$30 within days and widening the parallel rate premium. Despite resistance to dollarisation by the authorities, the market had fully self-dollarised at the time the authorities finally acknowledged when issuing as usual, another policy reversal allowing use of free funds in local transactions under the pretence of responding to the Covid-19 pandemic.
The onset of the pandemic provided an opportune moment for the authorities to scape goat into finally acknowledging that they had lost to market forces on the dollarisation battle. It had been predicted by some economic commentators in 2019 that the market was headed for full dollarisation by end of the first quarter, March 2020.
With that latest move, the authorities still inexplicably held on for some reason to the interbank peg of $25:US$1.
The result is now there for all to see. The parallel market rate has entered into an overdrive and the local unit is under attack.
To prove the in-effectiveness of policy at this stage, the Old Mutual Implied Rate (OMIR) has galloped from $60 to $102 over the same period. This is a stack indictment on the authorities’ level of control of matters and has fatally eroded the little confidence that had begun to be discernible on the market.
Market sentiments put this latest round of depreciation to several reasons, including but not limited to the following:
◆ Speculators, as always, have hit the market following the anticipated introduction of the new note denominations (The ZW$10 and ZW$20). While the introduction of the notes should not impact on money supply as these should simply replace electronic balances and the country’s notes and coins in circulation is still below the standard threshold 10 percent of money supply.
◆ It is estimated that the authorities are pumping in above $3 billion every month in reserve money through the gold incentives scheme and the retained forex credit for subsidies.
◆ The recent reopening of industry has pushed demand for forex as producers need to import raw materials.
Inflation for the month is now estimated at 750 percent leading to investors and corporates scurrying for cover in the sense of a currency that retains value. Everyone is dumping their local currency position All this is arising from policy inconsistencies and matters are now made worse by utterances from the authorities that the situation in the country is under the curse of demons! Many commentators wonder what these so called demons are when it is apparent that the implementation of half measures are largely contributing to increased doubts and lack of confidence. To date it is still not clear why the Reuters system has not been implemented to enable the willing seller willing buyer open market principle. It is also not apparent how the interbank rate is not being adjusted in line with market movements.
The pragmatic route to take would be to respond with an adjustment of the interbank rate if not removing it completely. It was always argued that the peg would not hold at whatever level as it had the same connotations as the parity principle which has a recent history of failure.
In conclusion, the exchange rate is projected to reach $100 by the end of May 2020 and unless the authorities adopt a realistic response to this movement, the local currency is once again headed for a complete annihilation and the country will be back in full swing to only the United States Dollar.
This would be a major setback to the objective of gradually moving away from the use of foreign currency for local transactions and the eventual adoption of a local currency. With hindsight, the previous call by some commentators to rather twin the local unit with the South African rand seems to be cropping up again.
The authorities are urged to abandon the pegged interbank exchange rate, implement in full the Reuters system and allow the market to freely trade on a willing seller willing buyer basis. Any further mistakes from now on will result on a complete removal of the local currency unit, with history repeating itself as in 2009.
◆ Misheck Ugaro Misheck Ugaro (263) 777052004/712808140 [email protected] Linkedin: https:// https://tz.linkedin.com/in/misheck-ugaro-23806210 Twitter: @twitcagan.com Misheck is a former expatriate banker based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society.
