ZIMBABWE’S currency volatility —manifested in the dramatic depreciation of the Zimdollar and a wave of price increases — has prompted local companies to ditch the dual monetary system for the sole use of foreign currency as the wobbly economy threatens business survival.
Although the southern African nation is officially using its own currency and the United States dollar, smaller towns close to the country’s ports of entry are using regional currencies such as the South Africa rand, Botswana pula, Mozambique meticais and Zambian kwacha.
Following the government’s floating of the foreign exchange market after years of shillyshallying, the domestic unit has in recent weeks dramatically lost value against major currencies, prompting business to press the panic button.
President Emmerson Mnangagwa’s administration blames the invisible hand for the volatility, claiming this could be a plot to dethrone him. He told senior Zanu PF members this week that the authorities will crack the whip on those accused of fueling economic instability.
Zimbabwe goes to elections on 23 August.
Officially, Zimbabwe’s annual consumer price inflation rose to 86.5% in May, up from 75.2% in April, marking a deviation from the downward trend recorded since the beginning of the year. Independent economic analysts however say in real terms inflation is now 761% for May — the peak it reached in August 2020 in the post-hyperinflation era.
The Institute of Chartered Accountants of Zimbabwe (Icaz) becomes one of the major high-profile organisations to make an urgent appeal to conduct business in foreign currency.
“Over the past few months, our nation has experienced significant volatility in the local currency making it increasingly challenging for organisations like ours to plan and execute operations efficiently,” Icaz says.
“The constant fluctuations in the exchange have created uncertainty and hindered our ability to provide consistent and reliable services to our esteemed members such as yourself.
“To address these concerns and ensure the smooth functioning of our operations, we kindly request your support in conducting business transactions with Icaz in foreign currency rather than the local currency. By transacting in foreign currency, we can mitigate the risks associated with exchange rate volatility and provide you with high quality services you deserve.”
Before this, Fawcett Security, one of the country’s oldest firms, raised the red flag over the collapse of the local unit.
“I wrote just 48 hours ago highlighting an increase in the official rate of 85% over 30 days, and explaining the need for a 60% increase in our Zimbabwe dollar June fees,” reads a letter dated 31 May written by Fawcett chief executive Andrew Laing to clients.
“This morning we woke up to the news of yesterday’s auction results; yet another slide, this time of a further 36% in a single week. This now translates to over 155% over 31 days. Who knows what June will bring? But what is apparent right now is that our fees for June will not be sustainable, and a top up will inevitably be required mid-month.
“Please don’t ‘shoot the messenger’ here. This is not our making. But you do have our assurance that we will absorb and mitigate as much as we can, as your best interests are also our best interests.”
What is currency volatility?
Currency volatility is the frequency and extent of changes in a currency’s value. It is measured by calculating the dispersion of exchange rate changes around the mean, expressed in terms of daily, weekly, monthly or annual standard deviations.
The larger the number, the greater the volatility over a period of time.
Companies are exposed to three types of risk caused by currency volatility: transaction exposure, translation exposure, and economic or operating exposure. The risks of operating or economic exposure can be alleviated through operational strategies and currency risk mitigation strategies.
How we got here
The Reserve Bank of Zimbabwe’s Monetary Policy Committee on Tuesday announced further measures to prop up the fast-depreciating local unit.
Zimbabwe liberalised its foreign-exchange market and raised interest rates, among a new raft of measures aimed at stabilising the nation’s currency and reining in resurgent inflation.
That fuelled exchange rate volatility; a risk associated with uncertainty in the exchange rate in foreign exchange market and is often driven by macro-economic factors, including interest rates, the balance of payments, and inflation.
This was the first time since the promulgation of an allocation limit of US$5 million by the government to the respective market.
During the session, allocations totalled US$4.9 million against total demand of US$25 million, highlighting the high appetite for the hard currency.
After climbing to US$1:ZW$4 800 on Wednesday from US$1:ZW$3 600 on Tuesday, retailers reacted to the news by effecting price hikes while others discouraged the use of the domestic currency.
Cumulatively the Zimbabwe dollar pared by 81.3% against the US dollar since the beginning of the year, on the auction market.
This has been its worst performance since re-introduction in 2019. The central bank said the interbank market will become the primary forex trading platform, taking away the function from the RBZ-controlled auction market.
Last year, the interbank accounted for 1.7% of total forex trades by value lagging behind an 8% auction market contribution.
This week, the local unit further depreciated against the greenback, closing the week at ZW$6 596.7:US$1 on the interbank rate. On the parallel market, one now requires nearly ZW$10 000 to buy a US dollar.