Govt will keep digging in on currency

IN the week under review the Zimbabwean dollar (Zimdollar) swept past the psychological 1:90 mark. The local unit has been losing ground against the United States dollar on a weekly basis, for 24 straight weeks.

The losses have, however, been relatively viewed as stable compared to the parallel market, which has exhibited significant volatility. The week's loss on the interbank at 1,64% was, however, the widest since the beginning of the year.

When looked at from a trend's perspective, the current week under review together with the prior week, show the widest loss over a two-week period since the 3rd quarter of 2020.

These trends and performances are not without context. There have been quite some maneuvers on the currency market in Zimbabwe and these have significantly impacted the broader economy.

The parallel market has moved more aggressively with the rate of currency depreciation coming in at significantly higher margins compared to the official market. At the time of writing, the parallel exchange rate is at least 80% ahead of the official rate.

The rate has moved from about 1:140 early in September to about 1:180 presently. This is a depreciation rate of over 20% compared to a less than 4% loss on the official market.

In Zimbabwe, the parallel market is used as a proxy for the pricing of goods and services across a greater portion of the economy. Zimbabwe's economy is believed to be 60% informalised and this means a broader section of the economy evades regulatory scrutiny and not only that, but also uses informal channels to access forex.

As an implication, prices in the broader economy largely mirror the parallel exchange rate. To factually reflect this dynamic, inflation in the country has been moving upwards on a month-on-month basis for three straight months up to September 2021.

The growth in prices reflects the adjustments necessitated by the movements in the parallel exchange rate.

The broader industry has for months hailed the stable exchange rate, on the official side, crediting it for demand resurge and growth in earnings.

This aspect cannot be discounted because allocations on the official market have more than doubled over the last 18 months, from a low of US$2 million to about US$5 million a session (5-day week).

This has enabled most of the formal economy to procure raw materials and scale up on production. The levels of capacity utilisation in the economy have since scaled up to after years of dwindling.

The growth in production would also result in growth in incomes and consumption levels in the economy. These developments are acknowledged and points to efforts from the Central government to stabilise the economy. The current state, however, points to an economy in disarray as shown by the plunge in the exchange rate on the formal market and the northwards trending of inflation on a month on month basis. Performances of these aggregates point that some things are not ok in the economy.

The government's position is that the movements in the parallel rate are not a reflection of the fundamentals. The government particularly the RBZ is of the view that economic fundamentals are in shape. It points to fiscal consolidation, growth in nostro balances position and lowering inflation as indication of a stabilising economy. Our view is that this is a wrong measure of stable economic fundamentals.

The austerity measures invoked in 2019 together with other fiscal tightening measures such the IMMT have curtailed demand. This has been made worse by the performance of inflation. Since 2019, inflation has largely gone up, particularly after the reintroduction of the Zimdollar.

The higher inflation helped erode purchasing power together with the stringent fiscal measures pursued under austerity. The result was a huge drop in consumption levels, high levels of poverty, company closures, dearth in the social service and political instability.

So while fiscal consolidation was achieved, it was done through unsustainable means. This means that the government could not hold on to the stability for long and therefore discounting the long term effectiveness of the measures.

The low wages, infrastructure decay and poor healthcare have led to low living standards, high levels of poverty and social unrest. Further the stability achieved on the official currency market is not sustainable as the Reserve Bank of Zimbabwe maintains control of the market.

It utilises export surrenders to influence the official exchange rate and this is tantamount to exchange rate manipulation. As the biggest supplier on the auction, the Bank has easily influenced the rate of exchange on the respective market.

With a stable official rate, the inflation conundrum in turn appeared to have been solved. This too sparks of weak fundamentals on the inflation and currency side. The country's exports have barely moved while the import bill remains large.

On the outlook, we are of the view that the currency market dynamics will continue to shape the rest of the economy in terms of direction. Our view is that the government will stick to the dual currency system at least up until the next election. We, therefore, see the government slowly letting loose the official rate to close the gap to the parallel rate, leaving out only a margin of 50% or lower.

This will in part be supported by the IMF SDR. We, however, see dollarisation coming back in earnest post the next election, since government would have run out of means to keep supporting the rate.

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Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net