Zimbabwe's exchange rates band to narrow

The gap between the official and parallel market exchange rates is expected to narrow further from the current 20% by the end of the year owing to the containment of reserve money, good agriculture season and financial sector stability, economists said.

Although the Zimbabwe dollar has recorded slight movements in recent weeks in both the official and parallel markets, the gap is still within the global acceptable levels. This week, the Zimbabwe dollar is trading at ZWL$83.89: US$1.

In his 2021 monetary policy statement, Reserve Bank of Zimbabwe governor, John Mangudya said the foreign currency auction system, introduced in June last year, has assisted in the discovery of an appropriate and stable market-based exchange rate for Zimbabwe.

He, however, admitted that more still needs to be done in that area.

He said the auction system has minimised distortions in pricing by curtailing speculative pricing and parallel market exchange rate indexation of prices by businesses.

"Consequently, the parallel exchange rate premium has reduced to a tolerable band of up to 20%, consistent with experiences in other countries. In addition, the establishment of an appropriate market-based exchange rate system has assisted in dampening pressures on inflation," Mangudya said in his monetary policy statement unveiled last week.

While research firm, Morgan &Co, is of the opinion that the exchange rates would be around ZWL$200: US$1 in the second half of the year due to high political and economic risk and stampede for foreign currency after Covid-19, several economists did not agree with the sentiments.

They said the Zimbabwe dollar will be appropriately placed and they do not expect a significant readjustment this year.

Economist, John Robertson, said the gap between the official exchange rate and the parallel market will be less than 20% at the end of the year.

"The authorities have done great to keep the rate at a reasonable level but more needs to be done. If the authorities keep starving the Zimbabwean dollar into the economy, the gap will be less than 20% by year end and in 2022 the rate is likely to reach equilibrium," Robertson said.

Another economist, Gift Mugano, told Business Times that the parallel market exchange rate will unlikely have a sharp upward movement given the policies put in place by monetary authorities.

"We agree that unexpected turn of events may happen here and there but projecting that the parallel market exchange rate will be at ZWL$200:US$1 during the second half of the year is a bit wayward due to the amount of the reserve money in the market which does not allow the overuse of the local money in the economy as the market remains starved," Mugano said.

"Excessive amounts of the local money in the market  pushes up inflation  hence in this case we are experiencing some shortages of the Zimbabwean dollar, as a result no huge movement on the exchange rate."

Mugano said there will be no pressure for food items this year owing to high production on the farms.

"The country will cut the import bill by at least US$500m, thereby helping the economy to utilise the money and reduce pressure on food stuffs which cause inflation," he said.

Mugano said horticulture and winter wheat production will rise given that water sources are at 100% capacity level which meant more water for irrigation.

The monetary authorities have tried to stabilise inflation and prices by ensuring that there is no excess liquidity in the market.

The central bank is currently mopping all excess liquidity from the market.

Mangudya said management of money supply and financial sector stability have kept in check the inflation and price stability.

The reserve money stood at ZWL$18.76bn at the end of December 2020 compared to a target of ZWL$25.20bn.