IN the session under review the Zimbabwe dollar (Zimdollar) broke a two-year trend of successive weekly losses, posting a significant 9,5% recovery in Tuesday’s weekly auction and wholesale trading.

Along the week and in the run up to Tuesday’s interbank trades, the Zimdollar had already begun to turn, marginally gaining against the US dollar.

It went on to hold the strengthening position through to Tuesday’s session. What is the interpretation of this event or is it an emerging trend?

Should we still be worried about the Zimdollar stability or should we consider that the unit has now stabilised and will continue to sustainably hold fort into the foreseeable future.

Exchange rate movements

To be able to best interpret the outcome and predict the future outturn of the Zimdollar, we need to focus on a few fundamental considerations and past performances of these variables.

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What has brought the Zimdollar crash to a standstill is the slowdown in liquidity injection.

In fact, the RBZ has almost completely stopped the issuance of new money into the banking system.

Prior to, the central bank engaged in money issuance through bare RTGS balances credit to exporters, for settlement of export surrenders.

This exercise is a slight variation but one which is worse off compared to the export incentive scheme of 2016.

The export incentive scheme of 2016 limited new money credited to exporters to only between 10% and 15% of total exports. This would then be calculated as the estimate rate of local (RTGS) money injected into the economy.

In the respect year, we argued that the scheme, which was accompanied with bond notes, was not going to cause inflation.

As history recorded it, we were wrong.

Our view ignored that the basic underlying and forceful driver of inflation was the huge liquidity created out of TBs issuance.

By 2018, the stock of TBs issued totalled US$8,2 billion, almost at par to Zimbabwe’s total external debt. Further and most importantly, we erred in believing that authorities were true to their word, that for any new bond notes issued, wired (RTGS) balances would be cancelled from the system.

The wired money, in the first instance was created out of TBs issuance, in essence a secondary currency from the USD. This was despite the 1:1 veil, which eventually was omitted.

From this background and multiple other examples over the past 15 years, we learnt that any serious decision-maker cannot take what the RBZ and government say at face value.

Simply put the authorities cannot be trusted on monetary issues.

Also, over the past four years that the Zimdollar has been in circulation, data also shows that there were periods of stability and these would emerge after significant volatility.

The RBZ and central government would intervene largely through tough as well as short term measures, which are typically unsustainable.

The effect of these measures has been to induce short term stability and defer turmoil into the future. This has always been a certainty. What could be different this time around?

There is little to suggest that the firming trajectory or at least stability can be sustained.

Government touts the amount of usable Zimdollar balances as being so low that a mere US$60 million would wipe out the entire balance.

It also touts the huge FCA balance now almost at US$1,5 billion as testament to a strengthening core base.

However, it has not entirely been sincere about the pace at which it is issuing local currency and this has been the source of the problem.

The central bank has claimed an imaginary tightening of money supply, but the base money numbers generated by itself show an expansionary monetary policy in place.

The RBZ has been printing money to finance Treasury projects, which because of economic volatility, would snap out of budget causing spend shortfalls.

There is a huge touted backlog of both due payments to contractors and also to exporters for surrender funds, that could easily rattle the market once released.

There is also spend pressure typical in an election year, which means RBZ cannot keep on closing the tap.

Already government is promising US dollar salary increments to civil servants and this will drive the budget deficit higher.

It is up to government how it finances this excess spend. A typical fashion would be to print money and purchase the forex thus causing another currency run.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. —respect@equityaxis.net