AFTER three months of stability, the parallel market rate spiked to levels above the 800-mark last week, sparking speculation about liquidity levels in the economy and the impact on price and currency stability.
Between August and the most recent weekly auction session, the Zimbabwean dollar was stable at about US$1:ZW$750, marking its most steady performance in two and half years. Two key dynamics accompanied the parallel rate performance. First, the auction rate sped up to close the gap with the parallel rate before stabilising at levels about 20% shy of the latter. This was a movement from ZW$478 per dollar to ZW$628 per dollar, a cumulative depreciation of 24% over nine weeks. The resultant premium was the most conservative (favourable) per session on record since 2020.
Another important dynamic was the concurrent decline in average weekly trades as losses on the auction market sustained while parallel rates were stable. Was this a normal trend? Typically, the depreciation on the auction market should have been associated with higher volumes of trades (turnover).
However, with cumulative depreciation of 25% over nine weeks, aggregate average trades per week trended lower at US$10 million per week down from US$30 million in the first six months of the year. This is a huge decline of 67% between the periods.
These notable market behaviours signalled a fundamental shift in the market. First, the unresponsiveness of the parallel rate, which had all along been moving in tandem with the auction rate albeit at parallel levels, was uncharacteristic. The possible reason for this shift was due to the liberalisation of the market in two ways.
The entrenched use of the US dollar in the economy meant that more players had the capacity to finance own forex requirements through direct sales.
A survey of the banking sector showed that about 66% of the total loans extended in the first six months of the year were in foreign currency. Further sales by companies are showing an increased forex contribution to total sales, which is now seen at average levels of over 50%.
While this has a connotation of depreciation factor, it also shows increased forex generation by local companies which previously relied on the auction for forex. This explains the decline in demand for forex through the foreign exchange auction market.
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Further, government conceded that it had been fuelling parallel market activities through payments to its contractors on various infrastructure projects it’s undertaking, which would spontaneously fuel local currency money supply. Contractors were the major movers of the exchange rate on the parallel market.
On tightening payments, activity on the parallel market slowed down partially explaining why the parallel market held at a point the auction market experienced a sharp decline in trades.
Further, following a pronouncement in May to the effect that the interbank market was allowed to trade higher values and officially become the market maker, the rate was loosened as government’s hand subsided. Collectively, there was an observed slow down in money supply growth and an increased usage of foreign currency in transactional business. Other government measures also buttressed the efforts to suppress the rate.
We maintain the view that the overarching measures adopted to stabilise the currency are not focused on fundamentals, which are matters that could impact national production and skew the current account in favour of Zimbabwe.
For example, gold coins are being used to mop-up liquidity and this effectively means deferring liquidity pressure to a future date. Through the multiplier, this may gradually slow down overall liquidity growth over the long term if other factors are constant.
What Zimbabwe needs are fundamentally focussed policy interventions targeted at productivity and a more effective cost management system which rid off a misaligned fiscus. With efficiency and proficiency in the fiscal management system, government provides a more enabling fiscal framework, which promotes private enterprise in turn attracting capital.
At this point, Zimbabwe does not have internal capacity to self-provide financial resources that can effectively reposition its economy on a sustained growth trajectory coupled with economic stability.
The “Nyika inovakwa nevene vayo” mantra is meant to promote local investment into the economy, an inward-looking policy. The challenge with this mantra is that the fiscal resources are already strained. Zimbabwe’s debt position is almost at par to its GDP, which means the ability to service debt is already inhibited. Most of the debt is already in default and this restricts access to new capital.
Stretching an already strained budget through government-driven projects risks mis-aligning the fiscus as resources are tinkered between competing needs resulting in the some payoffs which may have a higher opportunity cost.
For example, government used the currency devaluation of the local currency between 2019 to 2021, as a way to rechannel resources from recurrent expenditure (civil service wages) to capital expenditure. In the process, the levels of public service delivery plunged and this increased rent-seeking, corruption in the civil service, general poor service delivery and a plunge in aggregate spend.
A consequence of these measures is that the economy became worse off in economic growth terms and the ills of inflation and currency depreciation resurfaced. The delicacy of economic policy calls for authorities to be more careful in managing the payoffs in policy measures that pertain to economic growth and inflation, which often moves in inverse direction.
In trying to solve its economic challenges using local resources, Zimbabwe pushes itself to the edge where it typically has to go overboard excessively borrowing from local financial institutions and in some instances, creating new money. It is easier for the economy to respond to monetary shocks when the overall liquidity position is fragile, hence the volatility in currency.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — [email protected]