THE Zimbabwe dollar (ZWL) is facing massive depreciation pressures in both foreign exchange markets. As of June 15, the ZWL was valued at about ZW$7 600:US$1 against an official interbank rate of ZW$6 351.5:US$1.
This gives a parallel market premium (percentage difference between official and alternative market rates) of about 20%, which is within the conventional thresholds for currency stability. Month-to-date, the ZWL witnessed its worst performance against the USD as it slid 53% and 59% in the interbank and alternative markets respectively.
But since currency fluctuations are now a daily phenomenon, the market has now turned to forward pricing to minimise losses caused by these frequent exchange rate movements.
This is a practice of front-loading anticipated exchange rates in the current prices leading to self-fulfilling exchange rate depreciation with negative knock-on effects on prices. As of June 15, some wholesale and retail shops were applying forward rates exceeding ZW$12 000:US$1 which gives a market premium of almost 100%.
In addition, to cushion against exchange rate losses, some shops are now limiting ZWL transactions by faking ZWL point of sale (POS) system overload, some are now selling certain products exclusively in USDs, while others like manufacturers are now channelling their goods directly into the informal sector on the basis that informal traders pay cash upfront or at a point of collection. Profit maximisation together with cost minimisation are the essences of sustainable private sector enterprises.
So, to me, these actions by businesses cannot be regarded as intentional or mischievous but is purely based on the rationality principle. For instance, the Grain Millers Association of Zimbabwe (GMAZ) recently revealed that circa 80% of its members’ production costs including inter alia imported maize and wheat (100%), Grain Marketing Board maize (54%), repair and maintenance (100%), and transport (100%) are now denominated in USD.
Yet, GMAZ members are still owed an aggregate of circa ZW$12,.8 billion being outstanding payments of goods supplied in the past 90 days. The owed amount, which was equivalent to US$13,76 million in March 2023 (official rate: ZW$930:US$1) has been reduced to a paltry US$2,02 million in June (official rate: ZW$6 352:US$1).
This shows the danger of increased currency volatility as major exchange rate losses of over US$11 million have been incurred (and continue to be incurred) by GMAZ to date.
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Consequently, ZWL prices are now burgeoning in a fashion last seen during the build-up to the record hyperinflation of 2008. Officially, inflation was measured at 86,5% in May 2023, up from 75% recorded in April.
However, official numbers are blended statistics, which are a weighted average of stable USD prices and highly volatile ZWL prices. With the economy now estimated to be 80% dollarised, the stabilising effect of the USD on the weighted average (blend) is masking the real inflation tax – the loss of value of money due to inflation.
Independent estimates like the John Hopkins University Hanke Inflation Satellite are currently showing implied ZWL inflation rate breaching the 1 200% mark.
The rising inflation burden on ordinary citizens is plunging the majority below the poverty datum line (PDL). For instance, the Consumer Council of Zimbabwe (CCZ) statistics show that a low-income urban household of six required about ZW$1 015 962.61 in May 2023 to not be considered poor, up 66,2% from ZW$611 275 required in April 2023. In a move that will further fuel price inflation, the Zimbabwe Electricity Supply Authority (Zesa) increased its tariffs by 100% in the first week of June 2023.
Electricity is a key production enabler; its availability and affordability are key in supporting industrial activity. In terms of the former, Zimbabwe is witnessing improved domestic generation attributable to the coming on board of Hwange Unit 7 (300MW), partial injections from another Unit 8 (300MW), which is currently under test runs, and improved Kariba dam levels.
Latest official data show that electrical energy imports are now trending downwards from January 2023 peak of US$25,54 million to US$17,26 million in April.
While this is commendable, incessant ZWL fluctuations are making electricity unaffordable at a time prices of its substitutes like fuel and liquified gas remain highly elevated, way above the regional averages. All this feeds into production costs, the costs which in turn are shifted to the final consumer who happens to largely earn in the same fragile ZWLs.
With perpetual and increased currency volatility, authorities are gradually gravitating toward price controls. For instance, recently in June, the Financial Intelligence Unit (FIU) of the Reserve Bank of Zimbabwe (RBZ) reportedly froze the bank accounts of 12 major suppliers of goods and services including four supermarkets for allegedly refusing ZWL payments, diverting goods to the informal markets, and engaging in forward pricing practices which are fuelling ongoing ZWL decline.
To deter delinquent business practices, the FIU has further threatened to take remedial and punitive measures including inter alia imposing administrative fines, freezing bank accounts indefinitely, referring culprits to relevant authorities for suspension/revocation of trading or operating licenses, and prosecution.
These actions by FIU at a time parallel market premiums are exceeding 50% and official forex exchange markets are facing USD liquidity challenges are tantamount to price controls and risk causing acute shortages of goods and services in formal markets.
This is because price controls lead to prices that are not related to cost of production, cannot address scarcity, fail to tackle underlying reason for inflation, and distorts market forces of demand and supply. In the end, they affect direly needed mutual trust between authorities and the corporate world. Also, introducing price controls at a time the market is now full of negative perceptions and holding adverse expectations for the future as 2023 harmonised elections fast approaches will likely exacerbate macro-economic instability.
The currently obtaining situation (similar to yesteryear's election experiences) of rising incidences of political violence, police brutality, the passage of repressive legislation like the Patriotic Act, voters’ roll shenanigans by Zimbabwe Electoral Commission (Zec), and violation of property, human, and political rights has started to exert damaging effects on the economy.
In fact, the massive ZWL decline experienced since the start of June 2023 is largely emanating from market panic (adverse expectations) as compared to the prior period when it was the actions of the authorities (money printing) that was stimulating the decline. As such, there is a need for a combination of economic and political solutions to help save the ZWL from a second total collapse. With regards to the former, the measures proposed by authorities to date, such as promotion of use of ZWL, sterilisation of excess ZWL liquidity, liberalisation of the interbank market and tightening of monetary policy are a step in the right direction.
What is needed now is adequate political will to swiftly and fully implement these economic measures before it is too late. It is only political will to reform that will allow Treasury to spend within its limits, increase independence of the central bank, and curb leakages of public resources caused by corruption and illicit dealings.
Sibanda is an economist. He is a research associate with Zimcodd. He is a staunch advocate for inclusive and sustainable development. He writes in his personal capacity.