Zimdollar rescue mission too late

THE surprise move by Zimbabwe's fiscal and monetary authorities to liberalise the foreign exchange policy after months of shillyshallying amid a fixed rate could be a case of closing the stable door after the horse has bolted, analysts have warned.

Amid exchange rate volatility, the Reserve Bank of Zimbabwe's Monetary Policy Committee on Tuesday announced further measures to prop up the fast-depreciating local unit.

Zimbabwe liberalised its foreign-exchange market and raised interest rates, among a new raft of measures aimed at stabilising the nation's currency and reining in resurgent inflation.

That fuelled exchange rate volatility; a risk associated with uncertainty in the exchange rate in foreign exchange market and is often driven by macroeconomic factors, including interest rates, the balance of payments, and inflation.

Volatility is measured as the absolute value of the monthly percentage change in the exchange rate. The Zimbabwe dollar soon after the announcement of a market-driven exchange rate depreciated by 28% against the greenback, its worst decline on record since its inception.

This was the first since the promulgation of an allocation limit of US$5 million by government to the respective market.

During the session, allocations totalled US$4.9 million against total demand of US$25 million, highlighting the high appetite for the hard currency.

After climbing to US$1:ZW$4 800 on Wednesday from US$1:ZW$3 600 on Tuesday, retailers reacted to the news by effecting price hikes while others discouraged the use of the domestic currency.

Cumulatively the Zimbabwe dollar pared by 81.3% against the US dollar since the beginning of the year, on the auction market.

 This has been its worst performance since reintroduction in 2019. The central bank said the interbank market will become the primary forex trading platform, taking away the function from the RBZ-controlled auction market.

 Last year, the interbank accounted for 1.7% of total forex trades by value lagging behind an 8% auction market contribution.

Gift Mugano, an adjunct professor of economics at Durban University of Technology in South Africa, said the measures came too little too late.

"We are now implementing the right policies too late. We should have done this on 20 February 2019 when the interbank was introduced," Mugano said.

"This is too late! At this rate, wages, pensions, national budget and capital will be wiped out. Prices will hit the roof. It's getting worse! Without any doubt, Treasury has to: urgently revisit the national budget; make an urgent upward review of salaries and pensions and review the budget for contractors. As these reviews will be done, more liquidity will be poured into the market — adding paraffin on fire."

 Local economic research unit Equity Access highlighted the policy incoherence between fiscal and monetary authorities as the economy implodes.

"In most instances it has said that the Zimdollar plunge is due to behavioural factors most centred around confidence and speculation. In its latest update, the [central] bank said the depreciation has been motivated by more fundamental demand and supply factors," Equity Access said in a research note.

"It however absolved itself from wrongdoing maintaining the position that money supply has remained in check, a view supported by the Monetary Policy Committee (MPC). This view has been challenged by Treasury, which instead said the bank was printing money to finance the purchase of USD from exporters, who are demanded by regulation to surrender a portion of their earnings. This has not been the only loophole."

The central bank's issuance of Treasury Bills (TBs) valued at over US$1 billion, in recent months, to satisfy past dues, the research note further reads, has stimulated the depreciation of the local currency.

"The magnitude of TBs issued is so high that it only matches past election year issuance in 2008 and 2018," Equity Access says.

"If the bank continues in denial or deliberate disguise, while printing more money, the net outcome is an unlikely stabilisation of the Zimdollar. There cannot be any envisaged stability if the quantum of Zimdollar keeps growing at a disproportionate rate to production and earned forex."

 Prosper Chitambara, a senior researcher at the Labour and Economic Development Research Institute of Zimbabwe, a research think-tank of the Zimbabwe Congress of Trade Unions (ZCTU), said the liberalisation of the markets could in future eliminate the parallel market premium.

 "I think the resolutions are an important step in the right direction, we have seen the further tightening of the monetary policy regime and the foreign exchange regime has also been liberalised," Chitambara said.

"I think on the monetary policy side we are good, but where we need more tightening is the fiscal policy because of government's payments obviously — either to contractors or civil servants — we have seen an increase in liquidity and because of the loss of confidence in the local currency that liquidity is then converted into the United States dollar.

That then perpetuates the depreciation of the local currency." He said to ultimately sustain economic stability fiscal and monetary authorities should not be working at "cross-purposes".