THE relentless depreciation of the Zimbabwe dollar at a time some regional currencies have been firming against the United States dollar has highlighted the country’s toxic politics, confidence deficit buffeting the economy and the inflationary pressures of excessive money supply growth, analysts have said.
BERNARD MPOFU
The South African rand strengthened this week, as global investors welcomed signs of an easing of restrictions by China, ahead of a policy-focused week in Europe and the United States.
Experts say the domestic currency has also gained on China’s re-opening as its Covid-19 cases decline, further assisting calming market fears of recession, with the world’s second-largest economy lifting restrictions on economic activity.
The Zambian kwacha, on the other hand, has been holding firm against the dollar on the backdrop of investor-friendly policy and due to increasing hard currency supply from corporates buying the local currency to pay taxes.
Economic analysts and market watchers say the appreciation is largely driven by low demand for dollars on the market. While these regional currencies have been firming, Zimbabwe, which has over the past few months announced several measures aimed at preserving the value of the local currency and tame inflation, appears to be groping in the dark.
Like other central banks across the globe, stubborn inflation has continued to give the Reserve Bank of Zimbabwe a headache.
Experts say apart from the upside risk brought by Russia’s invasion of Ukraine on inflation, the monetarist view that inflation is always a monetary phenomenon became a self-fulfilling prophecy when the money supply expanded at a faster rate than the growth in national output during the first six months of the year.
Broad money (M3) closed May 2022 at ZW$971.54 billion, a 104.38% year-to-date increase while reserve money and currency in circulation went up by 12.64% and 21.75% to ZW$29.22 billion and ZW$6.27 billion, respectively during the same period.
“The domestic imbalances in money supply management and the Dutch auction system saw the further depreciation of the local currency (ZW$) as excess liquidity continued to chase a few US$ on the market,” local brokerage firm Akribos Research Services said.
“This resulted in the further widening of the parallel market premium to 91.12% by end of June 2022 as businesses and households continued to source the US$ on the alternative market to fund working capital requirements and consumption respectively,” Chris Mugaga, Zimbabwe National Chamber of Commerce CE, said the depreciation of the Zimdollar mirrored policy uncertainty and waning confidence in the local unit.
“Generally you will realise that Zimbabwe’s currency is a different currency altogether. The reason why some currencies will be firming, on average almost a basket of them, is because the quality of policy in their nations is not somehow disrupting currency,” Mugaga said.
“Currency is stable in those countries, so if the US dollar is not stable it is bound to depreciate against those currencies that are stable. You can’t put them in the same basket with Zimbabwe because Zimbabwe’s currency is arguably the most volatile in the world either on the parallel or official market.”
The volatility and movements of the Zimdollar, Mugaga said, are “unique, strange and cannot be accounted for by authorities.”
“Basic economics will tell you that some of the measures government has been taking seem to be right measures but that lack of response by both currency and inflation can then tell you that this economy needs a tool box which is completely different from what people might have learnt from conventional economics,” the ZNCC chief said.
“Sometimes the effects of tools such as interest rates, their transmission effects on an informal economy like Zimbabwe will remain handicapped.”
Economost Prosper Chitambara, a senior researcher at the Labour Economic Development Research Institute Zimbabwe, said the firming of the Zambian kwacha is a vote of confidence on the government in power.
“When you look at the Zambian economy, their fundamentals and key economic indicators like inflation which has been on a downward trend and obviously that has boosted the value of the kwacha against other major currencies,” Chitambara said.
“When you look at Zimbabwe, inflation has been trending up. So it’s really a question of macro-economic stability as evidenced by inflation so inflation erodes the value of any currency.
“The measures which were announced to tame inflation haven’t been really effective largely because of lack of confidence and trust in the economy. Broad money supply growth has continued to increase, so obviously that’s a major problem—it induces excess demand and it also affects the exchange rate. Because of chronic high inflation, people that are being paid in the local currency have to look for the US dollar on the black market to store their value.”
Gift Mugano, an independent economist based in Harare, said economic developments in Zambia are anchored on positive investor sentiments.
“One of the things which have happened in Zambia which is quite encouraging is that the new government has got some goodwill and there are positive sentiments which also come with the currency and I think that they are also doing reforms which are production-oriented,” Mugano said.
“That is our challenge here in Zimbabwe. On the contrary, I think South Africa had some negative sentiments on the back of a series of scandals which are coming on the Office of the President and corruption. Coming back to us, we did the opposite of what Zambia has done. We have quite bad sentiments in terms of our politics, because of the toxic environment which we have—the arrests which are happening to MPs. It’s not a good thing.”
He said excessive money supply growth has resulted in many Zimbabweans ditching the domestic currency for the US dollar.
“Also to note is that the major driver of our currency depreciation is excessive money supply, he said.
“In as far as I’m concerned the biggest demand of foreign currency is no longer the import demand but it is now demand for value preservation where everyone who has local currency will just have to overload it and buy foreign currency. That will kill the local currency and that is the major challenge that we face. But also suffice to say that who is in the black market? It’s the contractors. That’s why you even saw the Finance minister
issuing a statement saying don’t go and buy money from the black market. We have been saying this issue as economists since time immemorial, but they were not listening to us. But they are now saying it and writing statements to that effect.”
Finance minister Mthuli Ncube this week threatened to blacklist government contractors that are using their local currency balances to drive parallel market movements. This week, the local dollar was trading at US$1: ZW$403 on the official market compared to US$1:ZW$800 on the parallel market.
Without confidence, policy consistency and reforms, it will be a matter of when the local currency will be jettisoned, not if, analysts contend.
