IN the week under review, the Zimbabwean dollar (Zimdollar) lost 2,83% to settle at ZW$875 per US dollar. In each of the seven weekly sessions so far, the local unit has lost value against the United Staed Dollar.
A cumulative year to date loss of 24%, almost a third of prior year full year loss. What is worrying is the pace of decline, the fastest since 2019, which if maintained, will mark the worst annual Zimdollar performance since its reintroduction.
Authorities earlier warned state contractors against dumping currency on the parallel market and driving the rate southwards.
The practices remain the order in a market where foreign currency remains scarce and government projects dominate infrastructure development in the country.
The parallel market has, however, maintained a steady path since the beginning of the year. The market has experienced little
movement signalling a rechannelling in demand from the parallel to the formal market.
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What this shows is a relationship between the two markets and a general inadequacy of funds or market fractures perpetuated by a highly informalized economy.
From a high of 50%, the parallel market premium has lowered to 25% since the beginning of the year. Lower premiums discourage rent-seeking and encourage exports through reduced margin loss.
What is now certain about the Zimdollar is that it will continue to weaken sustainably against the US dollar at least, over the near-term period.
This is because while the stock of local currency may be growing at slower pace, foreign currency credit creation through foreign currency denominated loans is rising at a faster pace.
Data shows that base money growth picked pace in 2022, but most of the growth was due to the established forex required reserves and with foreign deposits accounting for the larger part of deposits, the ZWL value of the USD reserves is spontaneously increasing with the depreciation of the local currency.
Government has also reduced its borrowing via the central bank and other open market operations and instead relied on the sale of gold coins, which siphons or rather moderates the liquidity levels in the economy through locking short term spend.
The uptake of gold coins has been phenomenal and sustained demand has been driven by the need to preserve value, especially for bigger corporates and funds.
For currency to stabilise, demand for the Zi dollar has to go up and in the primary instance this objective was aided by the promotion of a wider utilisation of Zi dollars in transacting within the economy.
The economic argument of supply and demand denotes that the higher the demand relative to supply, the higher the price of the asset.
A new higher equilibrium will always be sought to match the growing demand. This was also one of the arguments against a wider utilisation of the USD in local transactions, that it inflates its price as its scarcity increase.
Authorities have given up on this front, instead promoting a wider utilisation of the stable USD currency to bring about stability. Data shows that the companies are earning at least 65% of their sales in forex and this simply reflects on the wider use of USD and the consequent sustained demand for the currency for the purpose of transacting.
This is not the only factor, which would drive the value of the foreign currency up above the local unit, but certainly, it is a consequential one.
One factor is a sustained propensity for imports, which is driven by a number of factors. In 2022, Zimbabwe achieved record total foreign currency receipts of about US$12,5 billion.
A study of the foreign receipts trend over the past 10 years shows that exponential growth is underpinned by remittances and exports of precious minerals.
This has been huge in that it has aided to the alteration of a negative Balance of Payments (foreign outflows against inflows) to a positive one. Essentially, on the net, the country is now able to fully meet its external obligations with own generated funds.
This is typically good for the currency as it raises demand for local currency. The demand for local currency in this instance is, however, indirect, in that, exporting companies are expected to change a portion of their earnings into the local currency, thus cushioning the value of the local currency.
- Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net.