Zimdollar rates tumble ahead of monetary policy

THE Reserve Bank of Zimbabwe (RBZ) is expected to announce the Mid-Term Monitory Policy statement in the coming days.

The market is not anticipating major changes to the country's economic fortunes from the upcoming policy statement as recent monitory and fiscal policies have been contractionary in nature.

However, there is a possibility that new Zimbabwean dollar notes and coins or more bond notes will be printed in order to ease physical cash shortages in the economy. The last monitory policy delivered on February 20, 2019 paved way for the reintroduction of the Zim dollar under the RTGS banner.

As a way to bring sanity to the financial markets and move towards open market systems, the central bank abandoned the 1:1 fixed exchange rate between the US dollar and the Zimbabwean dollar in pegging the rate at 1:2,5.

Since then, the local currency has lost more than 340% of its value and year-on-year inflation data was last reported by the government at 176% in June 2019. Analysts believe the inflation rate breached 400% in August as prices for various goods and services continue to skyrocket.

The hike in overnight accommodation and interest rates to 50% (from 15%) has not managed to tame inflationary pressures in the economy as there is still a lot of money circulating in and outside the formal banking channels.

The interbank market has moved from trading less than US$500 000 in the initial days to more than US$2 million per day currently. So far, close to US$680 million has been traded on the interbank exchange market, even though market confidence remains depressed. Exporters and various businesses are still holding onto more than US$1,2 billion in forex in anticipation that rates will continue tumbling.

The central bank has also commenced Treasury Bills (TBs) auctioning to test the market and raise critical funding for the cash-strapped government. The auctions have not managed to yield the desired result of mopping up excess liquidity in the market or stabilising the exchange rate. The last two TB auctions valued at US$90 million were oversubscribed, showing that there is still appetite for the short-term paper.

Zimbabwe banned the multi-currency regime on June 24 2019 through Statutory Instrument 142 of 2019 in order to tame growing demands for remuneration in foreign currency by labour.

In response, the Zimbabwe Stock Exchange (ZSE) has lost more than US$2,4 billion in the last two months from its peak market capitalisation of US$4,75 billion on the eve of June 23, 2019.

Even though the Zimbabwean dollar is now the legal tender, petroleum companies, classified local manufacturers, chrome miners, non-governmental organisations, embassies and multinational corporations operating locally can use foreign currencies for local transactions through their foreign currency accounts.

This also applies to the payment of import duty for the importation of certain commodities classified as luxuries by the government.

Despite the multi-currency ban, the US dollar has gained more value on the local market due to high demand for imports by local consumers and businesses, loss of trading confidence in the Zimbabwean dollar and hyperinflation which calls for preservation of value in a stronger currency.

The Zimdollar-to-US dollar rate has fallen by 17% to 10,83 as of September 2, 2019 in the past one month with bank market rates eclipsing 12,5.

The expected salary increment for civil servants from $582 to $1 023 for the lowest paid worker will likely be met with a jump in rates and increase in inflation in a typical stagflation dilemma.

The central bank has also failed to reign in on multi-tier pricing especially in the growing informal market with most goods having different prices for bond (cash), RTGS and foreign currency (US dollar or rand).

The bond note is now being traded at premiums above 40% to the RTGS and discounts being offered for bond note payments.

Exorbitant prices in the Zimbabwean dollar by retailers of pharmaceuticals, household appliances, construction and industrial equipment among others are pushing consumers back to the US dollar in a new norm of partial dollarisation that is creeping back on the local market.

Zimbabwe is exhibiting all the signs of macro-economic instability with depressed demand (drop in household incomes), declining production, hyperinflation and rising unemployment. It has become apparent to the central bank that taming inflation in the local economy requires far much more than the monitory policy.

There is need for policy coordination with Treasury (and executive leadership) to rein in the various economic ills. It will be very difficult to effectively de-dollarise the local economy if the authorities merely focus on the monitory policy intervention in isolation without implementing macro-economic reforms that instill fiscal discipline in government to curb recurring budget deficits, build confidence locally and internationally, address legacy sovereign debt issues and induce economic productivity, especially in manufacturing, agriculture and mining.

Victor Bhoroma is an economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.