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Runaway exchange rate wreaks havoc, govt panics

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THE Zimbabwe dollar’s massive depreciation on the parallel market has pushed the percentage difference between the official and parallel market exchange rates to over 120%, exceeding the widely accepted global threshold of at most 20% for currency stability to hold.

DUMISANI NYONI

In the past two weeks, the volatile Zimdollar has suffered its worst drubbing on the alternative market, depreciating to US$1:ZW$400 last week, after ending 2021 at US$1:ZW$280.

In its April economic review report, the Zimbabwe Coalition on Debt and Development (Zimcodd) said the local currency continued on a losing streak on both the official and alternative markets.

Four auction trades were conducted in April 2022 with the Zimdollar losing a cumulative 11.1% of its value against the greenback to close the month at US$1: ZW$159.35 from US$1:ZW$142.42 end of March 2022.

Cumulatively, the local currency has lost 37.76% of its value on the official market in the first four months of 2022. The local unit also slid by 31% in the alternative markets from an average rate of ZW$250 per US$1 in March 2022 to an average rate of ZW$360 by the end of April 2022.

“This is the biggest monthly decline in the parallel market since May 2020 when the Zimbabwe dollar fell by 44%,” Zimcodd said.

 “The massive Zimbabwe dollar depreciation in the alternative market pushes the parallel market exchange rate premium, that is, the percentage difference between official and parallel market exchange rate, to over 120% which exceeds the widely accepted global threshold of at most 20% for currency stability to hold.”

“The foregoing means that US$1 is now at least 120% more expensive in the black market than the price being offered in the official market. This alone creates excessive forex demand in the official market and therefore explains the burgeoning forex allocation backlog at the Reserve Bank of Zimbabwe auction,” it said.

With businesses benchmarking Zimdollar prices to the parallel rate as alluded to earlier, Zimcodd said the plummeting local currency means that Zimbabweans will continue facing rising prices of basics.

“Apart from high market liquidity and inefficient auction system, Zimbabwe dollar depreciation is also being fuelled by the increased chase of the US dollar by economic agents for value preservation as raging inflation mimics the public’s experiences with the 2008 hyperinflation where they lost almost all of their savings,” it said.

 In a bid to save the local currency from collapse, panicky authorities swung into action last week on Saturday, cracking down on banks, which have been forbidden from lending, while laying out tougher stock exchange trading measures.

But the Zimbabwe National Chamber of Commerce castigated the government for coming up with unrealistic measures to calm market jitters in the aftermath of a difficult month.

It accused the government of failing to react fast to economic chaos which triggers “such a confrontational approach and in the process, resulting in unintended consequences, that is, worsening the economic turmoil.”

 In his announcement, Mnangagwa said the government was convinced that the recent exchange rate movements were being driven by negative sentiments.

But the ZNCC said the government’s financing model for ongoing programmes and developmental projects were driving the rapid depreciation in the local currency. Theo government has been using short-term financing mechanisms to fund the Emergency Road Rehabilitation Programme, construction of dams and underwriting critical programmes.

“The Zimbabwe dollar being paid by the government to contractors is ending up chasing the greenback on the parallel market as they seek to preserve value. There is a hive of activity on the parallel market,” it said.

 “Government is currently the major holder of Zimbabwe dollar deposits and lack of strategic disbursements of those funds into the market has been catastrophic.”

“The government has ignored this reality. Therefore, the conclusion from the government that negative economic sentiments, not fundamentals, are driving the economy is partially incorrect. The fundamentals such as money supply and foreign exchange management are misaligned and those are actually driving negative sentiments, not blaming the adverse expectations,” it said.

The southern African nation is facing a currency crisis as the local currency continues to tumble heavily, particularly in the parallel forex market which largely supplies forex demanded by the informal economy.

 The informal sector is estimated to constitute at least 60% of the entire economy. As the Zimbabwe dollar continues to nosedive against the greenback, inflation keeps trending northwards as businesses benchmark their local prices on the parallel market rates as opposed to the official rate.

The annual inflation rate in Zimbabwe climbed to 96.4% in April of 2022, from 72.7% in March, reaching the highest since last June. Main upward pressure came from prices of fuels and food, precipitated by Russia’s invasion of Ukraine. On a monthly basis, consumer prices jumped 15.5%, the most since July 2020.

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