ZIMBABWE’S organised manufacturing sector lobby group says delays by the Reserve Bank in releasing key statistics on money supply growth for May has fuelled speculation on the main drivers of the dramatic collapse of the local currency.
The Zimdollar has over the past few weeks been losing value against major foreign currencies, raising suspicion that the apex bank was driving money supply growth.
The crash of the Zimbabwe dollar following the liberalisation of the foreign exchange market then prompted monetary and fiscal authorities to announce several measures to tame runaway inflation and the weakening currency.
The Confederation of Zimbabwe Industries (CZI) says while the measures may restore macro-economic stability in the short to medium term, risks still remain.
“The major risk that could emerge is partial implementation of the measures,” the CZI says in its research note for May.
“This might take the form of interfering with the exchange rate, especially given that it was suppressed for a long time and stakeholders are already beginning to feel the pain associated with the liberalisation process. If interference emerges, this will result in continuing distortions as reflected in the widening parallel market premium, which will then undermine confidence and lead to an intensifying ‘blame game’ between government and the business community.
“The RBZ delays in announcing financial statistics. It is still a guessing game as to what might have drove the unprecedented fall of the local currency over such a huge period between April and May 2023. The latest available statistics are for March 2023, which are not of much use in explaining the depreciation witnessed in May 2023.”
The parallel rate spiralled out of control in May 2023; it increased from US$1: ZW$2 000 at the end of April 2023 to US$1: ZW$4 500 by the end of May 2023.
The CZI says changes in Zimdollar prices mimic changes in the parallel market rate. Pronounced changes in the parallel market rate are felt through massive price hikes.
“If the exchange rate premium between the parallel market rate and the official market rate is wide, pricing in US dollars becomes not viable for formal business, as the Financial Intelligence Unit (FIU) forces businesses to use the formal exchange rate even if it is greatly overvalued,” the report reads.
“A wide exchange rate premium, therefore, always drives USD purchases to the informal sector.
“The current measures put in place to curb inflation commenced on 1 June 2023. It will take some time for the impact of the measures to trickle down the whole economy. If the measures are properly implemented, the parallel market exchange rate is expected to start showing stabilising momentum towards the end of June 2023.
Once stability is achieved, the blended inflation rate would be expected to mask the full impact on the ZWL$ inflation.”
While authorities blame business for the currency volatility, business organisations have on the other hand pointed the finger at the central bank for excessive money supply growth.
“There has long been a broad consensus that the core problem underlying Zimbabwe’s chronic inflationary pressures has been rampant money supply growth. Some of the sources of money supply growth was the funding of the surrender requirements,” the report reads.
“The RBZ had to release ZWL$ into the economy to pay for the foreign currency that it would be liquidating to exporters and use it to pay external loan obligations. This means that they were taking out USD from the economy and releasing ZWL$ into the economy, resulting in increase in money supply. The transfer of the obligation to Treasury seeks to address money supply growth. Another critical piece of the puzzle is creating demand for the local currency and the new measures have put in place some measures to create demand for the ZWL$.”