Exchange rates fail to hold

Respect Gwenzi.

THE direction of the Zimbabwean and United States dollars pair remained the same, southwards. While this has become very predictable, it is of consequence to a sustainable economic recovery and corporate earnings performance. It is also an indictment to government, which is responsible for policy formulation and boosting the economic objective of growth through an enabling stable environment and currency. In the week under review, the Zimdollar pared 1,22% to settle at US$1:ZW$892.

Over a cumulative period of eight sessions since the beginning of the year, the local unit has pared 25%. This is the fastest depreciation, over the same period, since its reintroduction in 2019. For the full year 2022, the local unit softened 85%, its worst annual outturn since 2019. These are worrying lows adding to that out of 48 trading weeks in 2022, the Zimdollar lost value in absolutely all the sessions.

The monetary policy of the country is clearly dysfunctional and ineffective or in fact is being manipulated (likely given the lack of independence of the RBZ) for the interest of some parties. This is a trait that has been with Zimbabwe for the longest time.

Why has the Zimdollar failed to hold?

Currency stability is established when there is a balance between the demand and supply of forex and the demand of supply of the local unit. The demand for forex similar to the demand of the local unit, is derived from the other. Forex demand emanates from the need to pay for foreign goods and services, while local currency demand stems from the need to settle domestic obligations by holders of forex.

If the demand for forex surpasses its supply levels, Zimdollar bids have to be increased resulting in a worse off outturn (currency depreciation). If the demand for forex is higher than its supply, the Zimdollar strengthens. If the Zimdollar demand increases relative to its supply, its value against the US dollar firms. Now if the if demand or supply for both simultaneously grows in proportionate order then price movement will be stable, all else being equal.

In real life, it is seldom that there is a proportionate growth of both. If it is so that the two’s volumes move in the same direction. A quicker growth in the supply of one against the other, means, its value is likely to suffer against the other.

In the case of Zimbabwe, the biggest challenge has been a quicker growth in local money supply ahead of forex supply. Between 2020 and 2022, base money supply grew by more than 170% annually and even when factored for exchange rate movements, the growth was above 100%. In turn Zimbabwe foreign currency receipts have grown but at a disproportionate pace.

It is quite clear that while the imbalance that has caused the local unit to weaken against the greenback is induced by the injection of money supply, which is through loan book growth, TBs issuance, central bank overdraft and mere money minting (electronic). These balances have been used to fund  several programmes, such as the infrastructure development projects being undertaken.

Despite an almost US$1 billion injection from the International Monetary Fund and sharp surge in exports, the government has come short of equilibrating the  currency market, which simply means the rate of currency injection is far much higher.

If there were no such measures as liquidity mop ups through gold coins, which we have warned have a cumulative-effect negative impact, if demand sags. A broader set of stop gap policy measures have been thrown in the mix to cushion the currency freefall, but this also goes to shows the extent to which Zimdollar money supply has been increased.

An emerging phenomena is that of local US dollar balances created out of credit extension in the same currency. The ration is above one as to two, meaning there is twice as much US dollar deposits sitting with local institutions than there is hard currency as measured by FCA and notes and coins.

We can conclude that there is no strategy in place to reconfigure the economy and stabilise the exchange rate given the sustained decline in the value of the local unit. The preferred route is that of a gradual decline, which is slow but sure. Outside of the open market operations at play, the impact of decline will remain under a degree of control at least over the short run.

Given that the economy is now operating on a dual currency system, which is skewed towards foreign currency, economic disruption will remain mild, but value erosion has the consequence of dampening aggregate demand and thus keep industry production levels at below capacity. Our expectation is that 2023 will be no different from 2022, the pressure, as is cyclical will increase as we head towards the middle of the year before cooling off and finishing the year on a gradual increase.


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

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