THIS week saw the local currency perform at its worst against the United States dollar (USD) since 2022.
At 12%, the weekly decline was the first double digit decline this year, as well as, the third worst performance in a single session since May 2022 when the government announced a raft of measures to cushion the local currency.
For relative perspective of this week’s loss margin, on average the local unit has eased by 2,7% year to prior week’s session.
On easing this week, the Zimdollar took its year-to-date loss to 58%, which is its quickest pace of decline on a comparative basis since its reintroduction in 2019.
Despite the expected plunge, which had been anticipated given the widening variance to the parallel market, the latter’s premium remained very high, even so heightening to levels last seen in May of 2022.
The parallel market premium soared to levels above the 100% mark for the first time this year, coming in marginally lower than an all-time high reached in May 2022.
The soaring premium against a steep formal market decline is indicative of the quicker pace of decline in the parallel market.
From the analysis of the data, as given above, the reference point of May 2022 gives a good indicator on outlook projections for the currency.
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What we can read from the historical permutation is that the auction market is now ripe for intervention.
At current levels authorities are likely to intervene through various measures to stem the decline as they did in the past. We, therefore, expect a market shock which industry has to brace for.
The shape which these interventions are likely to take is, however, going to be very different from prior year.
In 2022, the government used a cocktail of measures, including higher interest rates, intensive liquidity mop-up instruments notably the introduction of gold coins, zero coupon bonds, higher reserve requirements for financial institutions, a hike in capital gains tax and tight monitoring of financial activities through the RBZ’s Financial Intelligence Unit.
Already government has introduced digital gold coins, which are more divisible, transmittable and transactable.
The coins have started trading this week on Wednesday and according to the RBZ are backed by gold reserves.
The market is likely to embrace the currency given the alternative, which has failed.
The fiat Zimdollar has slowly been pushed out of the market and now accounts for less than 30% of overall market transactions.
With the issuance of gold tokens, the ratio of Zimdollar in total money supply will diminish to levels below 20%.
Government is, however, not likely to phase out the local unit.
There has always been a need by government to control monetary policy and influence the pace of economic growth.
Letting go of the Zimdollar effectively renders monetary policy ineffective. The little left of monetary policy leverage will be through the gold coins and digital tokens.
This leverage is, however, also limited to the extent of the value of the two instruments in issue. Ahead of the election, government is not likely to be too tough and will pursue policies that are moderate so as to encourage consumption.
There is expectation of an interest rate hike, but we expect it to be only symbolic if it comes.
The odds for a hike are, however, low, given the RBZ and government’s view purporting that the economy is stable.
This view is simply intended to sway public perception, given the RBZ, underlying position that much of the loss in currency is driven by adverse sentiment other than a disproportionately higher volume of Zimdollar in the market.
Where to from here
All disruptions have both downside and upside however, disruptions of inflationary nature, typically have more downside than upside for a majority of the populace.
Pension funds, financial instruments and entities generating higher volumes of local cashflows have a chance to increase exposure on semi hard currency through some of these instruments suffice they carry good rates, if money market or fundamentals are in favour of firming prices, for commodities or equity exposed investment.
These later instruments are generally targeted for value preservation. If the hot liquidity finds home in similar avenues, the pace of Zimdollar decline will over the mid-term, subside, but only if government does not issue new money recklessly as is the case today.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. —[email protected]
