AT least US$2 billion is circulating outside the country’s formal banking system as yesteryear memories of hyperinflation continue to haunt depositors, more than a decade after the central bank raided foreign currency accounts at the height of economic implosion, Reserve Bank of Zimbabwe Governor John Mangudya (pictured) has said.
In 2008, Zimbabwe recorded the highest inflation rate in the world for a country outside a war zone. Officially at 231 million percent, the runaway inflation led the collapse of the Zimbabwe dollar, prompting the authorities to grudgingly adopt a basket full of foreign currencies, mainly dominated by the United States dollar, as a desperate measure to rescue the economy.
Mangudya told delegates attending the launch of the African Development Bank-led Zimbabwe Country Brief (2021-23) and virtual private sector roadshow that the growing disparity between the official exchange rate and the parallel market rates is being driven by low confidence in the official banking system.
“One of the challenges that we have and which we are working on is that the gap or disparity between the official exchange rate and the parallel exchange rates—we need to find a solution for that,” Mangudya said.
“Currently our thinking as a central bank, our hypothesis after empirical evidence, is that the gap between the parallel exchange rate and the official exchange rate is not due to fundamentals. Our fundamentals are such that the rate should stabilise and at the very best should appreciate. Our fundamentals are such that the foreign currency in this country in the banks is about US$1.7 billion as of yesterday (Wednesday) and the national reserves which is net international reserves in the hands of the Reserve Bank is US$1.1 billion (inclusive of the 960 million SDRs that we received from the IMF). So if you add the two—that’s US$2.8 billion. We also know that there is about US$2 billion of foreign currency in circulation in Zimbabwe. So if you add the US$2 billion plus US$2.8, that’s US$4.8 billion that we can say is in Zimbabwe.”
During the topsy-turvy economic environment, the central bank, whose national reserves were depleted as gold output also plunged, raided individual and corporate foreign currency accounts to access the elusive greenback which was required to purchase critical imports.
“Now what is the quantity of money in Zimbabwe in circulation? Our money supply (M0) is ZW$28 billion. If you divide ZW$28 billion by the official exchange rate, you get about US$300 million. If you take the Treasury Bills that the banks are holding and if you to monitise them, they are about US$300 million,” he said.
“That brings the total to US$600 million, so you cannot have about US$600 million worth of local currency chasing US$2.8 billion which is known, but if you add the money that is in circulation it’s over US$4 billion. So at the very best what we are seeing is that it is not about economic fundamentals. Fundamentals are good. So it means, it is about sentiment, which is your confidence and the demand to hold on to foreign currency. Why? Because of the past experience of hyperinflation . So it’s a fear factor.”
Official figures show that the auction rate only increased by 7% between August 2020 and August 2021 to ZW$86 per US$1, while over the same period, the parallel market increased by more than 53%. Officially, the Zimbabwe dollar is trading at 1:85 against the greenback while the parallel market rate is around 1:160.