'Zimdollar volatility makes no sense'

The Reserve Bank of Zimbabwe (RBZ) believes disproportionate demand for the US dollar and lingering fears of hyperinflation are driving exchange rate volatility, as the country's currency should ordinarily be stable considering obtaining strong economic fundamentals.

There have been resurgent inflationary pressures partly because of the Russia-Ukraine conflict, which is driving prices of critical imports.

The domestic currency has lost ground against the greenback and is now trading at around $160:US$1 on the auction market.

Its slide has been marked on the parallel market, where it is trading between $350-$380 depending on volumes.

However, RBZ Governor Dr John Mangudya said wild swings in the exchange rate were unwarranted given that foreign currency inflows into the economy far exceed local deposits.

It has since emerged that authorities would soon be rolling out a cocktail of measures to defend the domestic currency.

"The country generated foreign currency amounting to US$9,7 billion in 2021 and has so far received US$2,4 billion for the first quarter of 2022, representing an increase of 17,6 percent from US$2,04 billion received during the same period in 2021," said Dr Mangudya.

"Money supply has also remained under control, with average reserve money of $28 billion, equivalent to about US$180 million at the auction rate.

"In addition, the total local currency deposits at $313 billion at the end of March 2022 is equivalent to around US$1,3 billion at the current interbank rate.

"This amount is more than covered by the foreign currency deposits (FCA) deposits in the banking sector averaging US$1,5 billion.

"The country's stock of gross foreign currency reserves amounting to US$1,01 billion, including SDR (special drawing rights) allocation, is in addition to the US$1,5 billion in the market."

Current liquidity levels, he added, were insignificant to warrant volatility in the foreign exchange market.

The central bank opines the trend is being driven by behavioural factors and negative inflation expectations.

"The strong fiscal stance since 2020 has allowed the bank to control money supply. Currently, the reserve money target has been reduced to 5 percent per quarter since the beginning of the year. As such, foreign exchange disturbances from money supply are limited," he said.

"The bank's view is that the negative sentiment or perception is attributable to people's past experiences with hyperinflation in 2008 and currency reforms in 2019 when people's savings were decimated by inflation."

Zimbabwe's inflation peaked to 200 million percent in August 2008 and ultimately affected the local unit, which was later replaced by the multicurrency system in February 2009.

Most recently, inflation touched a post-dollarisation high of 837,5 percent in July 2020, amid growing exchange rate volatility in the absence of a true market-determined exchange rate for reference.
The introduction of the foreign currency auction on June 23, 2020 resulted in the sustained drop in inflation to a two-year low of 50,6 percent in June last year.

But resurgent inflationary pressures emerged late last year amid renewed market indiscipline and speculative behaviour, which has been worsened by rising prices of key global commodities due to the war in Ukraine.

Under the current circumstances, Dr Mangudya said, the US dollar, as a reserve currency, is being held as a store of value.

"The preference to hold US dollars has thus continued to put pressure on the exchange rate and ultimately on the pass-through effect on inflation."

He said policy interventions to address current challenges should consider the need to restore and boost confidence and discipline in the economy.,

Reserve Bank of Zimbabwe (RBZ) Monetary Policy Committee (MPC) member Professor Ashok Chakravati indicated that "Government is considering a raft of measures…they could be announced very soon."

Similarly, economist and MPC member Mr Persistence Gwanyanya said authorities were of the view that the domestic currency was being affected by lack of confidence.

He said Government will, however, unveil measures to deal with market aberrations.
"What is important is for the Government to come up with a cocktail of measures. It is not going to be one measure, but a cocktail of measures. Government is, together with the Reserve Bank, coming up with a package of measures.

"This package of measures is intended to tackle the issue of exchange rate (challenges) head-on and in a more permanent way," Mr Gwanyanya said.

Interventions would include clearing the auction market forex backlog, limiting auction allotments to available forex amounts, while allotments would also be increased in line with increased inflows from the platinum sector after the export tax issue was resolved.

There would be additional measures to promote the use of the Zimbabwe dollar, including for import duty and tax payments to improve the appeal of the local unit.

Economist Professor Gift Mugano said funding for agriculture and massive public infrastructure projects across the country could be creating liquidity that is driving the exchange rate.

Treasury, he said, was using short-term funding to finance infrastructure, which accounted for 32 percent of the budget in 2021 and 34 percent in 2022.

"We are talking about over $300 billion going to roads and other capital expenditures like dams. When you bring in agriculture, it takes 12 percent of the budget, which is just above $100 billion.

"If you say capital expenditure plus agriculture expenditure, it is almost half of the national budget going to two areas. We are talking about $400 billion, which is finding its way into the market."

The solution could lie is using long-term finance.

He added that measures to further refine the auction market could also help.