Interest rate hike haunts black market kingpins

Interventions by the Reserve Bank of Zimbabwe (RBZ) to stem prolonged currency battering have sent black market rates tumbling by over 50 percentage points within a month, Inter Horizon Securities (IH) has said, but cautioned against early celebration.

In a commentary to the midterm monetary policy released on Friday, IH also listed several actions that it attributed to black market upheavals.

"From mid-July, the exchange rate premium has collapsed from circa 102% to the current 49% while the parallel rate cooled from US$1: $790 to the current US$1: $720," IH report noted.

"Recent policy adjustments have been effective in curbing artificial forex demand driven by speculators and arbitragers.

The central bank hiked the interest rate from 80% to 200% per annum bringing the cost of borrowing closer to the inflation rate to remove the arbitrage that had been created by "cheap funding," IH noted.

"This reduced borrowing of funds for speculative purposes. Going forward the RBZ will be reviewing interest rates in line with developments in monthly inflation.

"The auction rate has devalued by 22% since mid-July. The collapse of the exchange rate premium also removes the arbitrage created for those who have access to cheap funding in the formal system," IH added.

Much of the bloodbath was reported after July 25, when the RBZ injected more than US$3 million worth of gold coins to mop up excess liquidity and provide the market with an alternative store of value.

In his monetary policy statement, the RBZ chief acknowledged knocking out an enemy that had given him sleepless nights for three years.

"In addition, subsequent measures taken by the bank (RBZ) to increase interest rates and introduce gold coins as an alternative stable investment product for store of value and mopping up excess liquidity from the economy have gone a long way in preserving the value of the local currency," Mangudya said.

"As at 10 August 2022, 4 475 gold coins had been sold realising $3,7 billion of which 90% was paid in local currency and the balance in foreign currency, and evenly distributed throughout the agents. The high demand for the gold coins will assist in mopping up liquidity from the market and thus strengthen the demand and enhance the value of the local currency. The bank shall continue to release additional gold coins into the market on an ongoing basis in line with demand," Mangudya said.

Since the release of the gold coins, the majority of parallel forex dealers have been offering $700 for the greenback, a drop from between $900 and $970 before the release of the gold coins.

The rates differ depending on where dealers would be operating from.

"The price of the gold coins is determined by the London Bullion Market Association…gold price plus a margin of 5% to cover the production and distribution costs," Mangudya said.

"The price of the gold coin on the date of initial release, 25 July 2022, was US$1 823,80 or $805 745,35 in local currency. Fluctuations will be experienced on the US$ and $ prices as a result of the movement in the international price of gold and the exchange rate," he said.

But leading analysts cautioned against early celebration.