IN the latest week on the auction market, the Zimbabwean dollar experienced a marginal depreciation of 2,08% against the US dollar, continuing a trend of disproportionate losses when compared to the unofficial market.
Over the past month, the local currency has only depreciated by 7% against the US dollar on the auction market, while the parallel market has experienced a much larger loss of 23%.
These divergences reflect market inefficiencies and the higher parallel exchange premium points to shortcomings in the market. Currently, the parallel market premium stands at 96%, up from 62% at the end of March.
If the formal market continues to depreciate at its current pace, the gap between the parallel and auction markets may widen in the coming weeks.
Historically, a wider gap has resulted in market distortions that negatively impact production and value retention by economic players.
Based on the data provided, it is likely that the parallel premium will continue to increase in the near future.
The widening gap between the parallel and auction markets suggests that the market is not functioning efficiently, and this can lead to negative economic impacts.
It is important for policymakers to address these market inefficiencies and implement policies that promote a stable and efficient foreign exchange market in Zimbabwe.
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The Zimbabwean dollar is currently experiencing turbulence and instability, and businesses should not be misled by temporary stability that might be achieved through short-term measures like the proposed introduction of the gold backed digital currency.
To address the situation of currency depreciation, fiscal and monetary policies have been implemented to tighten financial and capital market controls and reduce excess liquidity, which have failed to stabilise the Zimdollar due to electioneering decisions like the increase of civil servant salaries.
In Zimbabwe's highly informal economy, the parallel exchange market plays a crucial role in facilitating transactions and providing access to foreign currency due to a combination of factors, including a shortage of foreign currency, restrictions on currency exchange, and market inefficiencies.
Attempts to eliminate the parallel exchange market through government intervention, such as currency controls or crackdowns on informal currency traders, may not be effective and can instead lead to negative economic consequences, such as increased market inefficiencies.
Therefore, policymakers should focus on implementing measures that promote a stable and efficient foreign exchange market, such as increasing the supply of foreign currency, improving market transparency and reducing the regulatory burden on formal currency exchange channels.
Although it is unlikely that the parallel exchange market can be completely eliminated in Zimbabwe's highly informal economy, policies that promote a more efficient and transparent market can help to reduce the negative economic impacts of the parallel market and promote sustainable economic growth.
Based on the information provided, it is likely that the Zimdollar will continue to experience turbulence and instability in the near future.
While fiscal and monetary policies have been implemented to reduce excess liquidity and tighten financial and capital markets controls, the reliance on stop-gap solutions such as gold coins and government securities is not sustainable in the long term.
Without solid fiscal reconfigurations, the economy is at risk of a drastic implosion.
Therefore, it is crucial for Zimbabwe to adopt sustainable policy measures that promote long-term economic stability and growth.
It is difficult to predict the exact trajectory of the Zimdollar, but it is likely that without sustained efforts to address underlying issues, the currency will continue to face challenges and instability.
Introducing a gold-backed digital currency in Zimbabwe could have several implications for the country's exchange rate dynamics.
A gold-backed digital currency could help to bolster exchange rate stability in Zimbabwe, as it would be backed by a tangible asset (i.e. gold).
This could help to alleviate concerns about the value of the Zimbabwean dollar and reduce currency volatility.
A gold-backed digital currency could also help to reduce inflation in Zimbabwe, as it would limit the amount of money that can be printed by the central bank.
This could help to stabilise prices and prevent hyperinflation, which has been a significant problem in Zimbabwe in the past. A gold-backed digital currency could improve investor confidence in Zimbabwe's economy, as it would offer a more stable and secure means of storing value.
In addition to introducing a gold-backed digital currency, Zimbabwean monetary authorities could adopt more disciplined fiscal policies, such as reducing government spending and improving tax collection, to reduce the budget deficit and prevent excessive money printing.
Zimbabwe should also undertake structural reforms to improve the business environment and attract foreign investment. This could include streamlining regulations, improving infrastructure and reducing corruption.
Zimbabwe could work to diversify its export base, reducing reliance on a single commodity such as gold or diamonds.
This could help to reduce the impact of commodity price fluctuations on the economy and stabilise the exchange rate.
Zimbabwe could work to strengthen its financial sector by improving banking regulations, increasing transparency and promoting financial inclusion. T
his could help to increase confidence in the financial system and support economic growth.
Collaborating with international partners, such as the International Monetary Fund (IMF) or the World Bank, to access financing and technical assistance is also necessary.
This could help to support economic reforms and stabilise the exchange rate. Zimbabwe has had a difficult relationship with the International Monetary Fund (IMF) in recent years, which has made it difficult for the country to access assistance from the organisation.
The IMF has historically been critical of Zimbabwe's economic policies, particularly its handling of debt and currency issues.
The country has a history of defaults on its external debt, and the IMF has been reluctant to provide financial assistance until the country shows a commitment to implementing economic reforms.
In addition, Zimbabwe has faced significant political challenges in recent years, including allegations of human rights abuses and concerns about the rule of law.
These issues have made it difficult for the country to build trust with the international community and access financial assistance from organisations like the IMF.
Overall, while Zimbabwe has faced challenges in accessing assistance from the IMF, there are indications that the country is making progress in addressing these issues and building a stronger relationship with the international community.
Stabilising the exchange rate in Zimbabwe will require a combination of policies that address both short-term and long-term challenges. It is important for policymakers to adopt a comprehensive approach that promotes economic stability and growth over the long term.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — [email protected]