News / Local
Authorities unleash sweeping crackdown on forex market
03 Oct 2021 at 03:19hrs | Views
IN a renewed bid to contain the runaway foreign exchange rate - now trading at double the official rate around US$1: ZW$170 - the government has launched a fierce crackdown on currency traders in a multi-pronged approach deploying law and order instruments, and leveraging market intervention measures.
The official exchange rate is US$1:ZW$85.
Since last week, at least 14 currency dealers have been arrested in what is codenamed Operation Pangolin.
The arraigned executives and dealers now await rulings on their various bail applications on Monday.
The sweeping campaign is coordinated by fiscal, monetary and security clusters that have been alarmed by the rate at which the Zimbabwe dollar has been overrun by base currencies, especially the United States dollar, in the foreign exchange market.
Vice-President Constantino Chiwenga (pictured) has warned currency dealers — officially described as "economic saboteurs" — that they will be dealt with ruthlessly.
The Reserve Bank of Zimbabwe (RBZ) has also released a statement listing individuals it says are forex rate-fixers who need to be named and shamed, besides being prosecuted.
RBZ governor John Mangudya said while there are parallel markets everywhere in the world, the unique aspect of the Zimbabwean situation is that it defies economic logic and is characterised by irrational market behaviour.
"Parallel markets exist everywhere around the world, determined by the rules of demand and supply, but the Zimbabwean situation defies economic fundamentals and the attendant dynamics," Mangudya told The NewsHawks.
"The fundamentals are strong. The country has US$1.7 billion in nostros. There are new funds in the form SDRs (International Monetary Fund Special Drawing Rights) which are about US$1 billion. There is also US$2 billion which is in circulation in the market. That is over US$4.5 billion, in fact close to US$5 billion. Exports and diaspora remittances are doing well. Capacity utilisation has gone up. So the rate should be following fundamentals and economic dynamics, stabilising, but it is not. Even when the tobacco marketing season started and ended, the rate still continued to depreciate.
"Now this is where we begin to investigate what is driving the exchange rate. There are many factors that come into play. Among these you will find the laws of demand and supply, the exchange rate is a monetary phenomenon; there are critical fundamental considerations, sentiment or confidence factors, and behavioural or speculation issues.
"Yet there are also currency attackers, these are economic saboteurs, exchange rate manipulators or fixers. They destroy the market and economy. Some of them act like sport match-fixers. They are opportunistic arbitrage entrepreneurs or rent-seekers."
Analysts say, moreover, the exchange rate influences other factors such as interest rates, inflation and even capital gains from domestic securities.
While exchange rates are determined by numerous complex factors that often leave even the most erudite and experienced economists flummoxed, investors should still have some understanding of how currency values and exchange rates play an important role in the rate of return on investments.
"The biggest driver of the exchange rate movement at the moment is public infrastructure development programmes such as the building of roads, dams and housing. Contractors are usually paid in local currency — this involves billions of dollars — and when they get the money they rush to the black market. That changes the demand and supply forces and upsets the equilibrium. Once money supply increases, the rate goes up," one analyst said.
"The forex auction is 12 weeks behind in settling outstanding payments, hence corporates are resorting to the alternative market. Zimbabwe currency flows are seasonal. Every September after the tobacco auction floors close the rate depreciates because of lack on inflows. Nothing new there.
"The biggest problem is the ongoing printing of money by government to fund infrastructural development programmes. The Beitbridge highway project and various Chinese construction works are a case in point. If you combine these factors, you have a solid and proper explanation of what is happening on the ground. It's not about individuals. It's a market environment, with fundamentals, market forces and dynamics to manage. Of course, speculation is an issue, but not the only or the critical factor. There is need for a holistic approach to address the situation. Applying a law and order strategy, raiding and detaining people, is not effective in dealing with complex market issues like these."
Analysts say to address the problem, the government needs a root-cause analysis, focusing on variables like inflation, interest rates, public debt, economic health, current account deficit, balance of trade and reserves, government intervention, political stability and confidence.
"Sometimes currencies are affected by the confidence (or lack thereof), which the market has in a particular currency. Currency changes from speculation tend to be irrational, abrupt and ephemeral," one analyst said.
"For example, traders or dealers may devalue a currency based on political considerations, especially if the events are perceived as unfavourable for business or the economy. In other cases, traders may be bullish on a currency because of economic news, which may buoy the currency, even if that did not affect the currency fundamentals. That's sentiment and it's the biggest driver of exchange rate movement in Zimbabwe at the moment."
The official exchange rate is US$1:ZW$85.
Since last week, at least 14 currency dealers have been arrested in what is codenamed Operation Pangolin.
The arraigned executives and dealers now await rulings on their various bail applications on Monday.
The sweeping campaign is coordinated by fiscal, monetary and security clusters that have been alarmed by the rate at which the Zimbabwe dollar has been overrun by base currencies, especially the United States dollar, in the foreign exchange market.
Vice-President Constantino Chiwenga (pictured) has warned currency dealers — officially described as "economic saboteurs" — that they will be dealt with ruthlessly.
The Reserve Bank of Zimbabwe (RBZ) has also released a statement listing individuals it says are forex rate-fixers who need to be named and shamed, besides being prosecuted.
RBZ governor John Mangudya said while there are parallel markets everywhere in the world, the unique aspect of the Zimbabwean situation is that it defies economic logic and is characterised by irrational market behaviour.
"Parallel markets exist everywhere around the world, determined by the rules of demand and supply, but the Zimbabwean situation defies economic fundamentals and the attendant dynamics," Mangudya told The NewsHawks.
"The fundamentals are strong. The country has US$1.7 billion in nostros. There are new funds in the form SDRs (International Monetary Fund Special Drawing Rights) which are about US$1 billion. There is also US$2 billion which is in circulation in the market. That is over US$4.5 billion, in fact close to US$5 billion. Exports and diaspora remittances are doing well. Capacity utilisation has gone up. So the rate should be following fundamentals and economic dynamics, stabilising, but it is not. Even when the tobacco marketing season started and ended, the rate still continued to depreciate.
"Now this is where we begin to investigate what is driving the exchange rate. There are many factors that come into play. Among these you will find the laws of demand and supply, the exchange rate is a monetary phenomenon; there are critical fundamental considerations, sentiment or confidence factors, and behavioural or speculation issues.
"Yet there are also currency attackers, these are economic saboteurs, exchange rate manipulators or fixers. They destroy the market and economy. Some of them act like sport match-fixers. They are opportunistic arbitrage entrepreneurs or rent-seekers."
Analysts say, moreover, the exchange rate influences other factors such as interest rates, inflation and even capital gains from domestic securities.
While exchange rates are determined by numerous complex factors that often leave even the most erudite and experienced economists flummoxed, investors should still have some understanding of how currency values and exchange rates play an important role in the rate of return on investments.
"The biggest driver of the exchange rate movement at the moment is public infrastructure development programmes such as the building of roads, dams and housing. Contractors are usually paid in local currency — this involves billions of dollars — and when they get the money they rush to the black market. That changes the demand and supply forces and upsets the equilibrium. Once money supply increases, the rate goes up," one analyst said.
"The forex auction is 12 weeks behind in settling outstanding payments, hence corporates are resorting to the alternative market. Zimbabwe currency flows are seasonal. Every September after the tobacco auction floors close the rate depreciates because of lack on inflows. Nothing new there.
"The biggest problem is the ongoing printing of money by government to fund infrastructural development programmes. The Beitbridge highway project and various Chinese construction works are a case in point. If you combine these factors, you have a solid and proper explanation of what is happening on the ground. It's not about individuals. It's a market environment, with fundamentals, market forces and dynamics to manage. Of course, speculation is an issue, but not the only or the critical factor. There is need for a holistic approach to address the situation. Applying a law and order strategy, raiding and detaining people, is not effective in dealing with complex market issues like these."
Analysts say to address the problem, the government needs a root-cause analysis, focusing on variables like inflation, interest rates, public debt, economic health, current account deficit, balance of trade and reserves, government intervention, political stability and confidence.
"Sometimes currencies are affected by the confidence (or lack thereof), which the market has in a particular currency. Currency changes from speculation tend to be irrational, abrupt and ephemeral," one analyst said.
"For example, traders or dealers may devalue a currency based on political considerations, especially if the events are perceived as unfavourable for business or the economy. In other cases, traders may be bullish on a currency because of economic news, which may buoy the currency, even if that did not affect the currency fundamentals. That's sentiment and it's the biggest driver of exchange rate movement in Zimbabwe at the moment."
Source - The NewsHawks
