Since 2020, the Reserve Bank of Zimbabwe (RBZ) has been grappling with the challenge of balancing the supply and demand for foreign currency, particularly in the last quarter of each year when demand surges due to agricultural and festive season preparations.
In October, a US$50 million injection into the interbank market sought to stabilise the Zimbabwe Gold (ZiG/ZWG) currency and ease foreign currency pressures. Yet, the practical impact has been limited.
The formal economy, dominated by corporate players, holds sway over the interbank market, leaving out Zimbabwe’s vast informal sector, which constitutes about 80% of the economy.
The resulting supply-demand mismatch creates a distorted exchange rate on the interbank market, failing to meet the import-heavy needs of the informal sector. As a consequence, businesses increasingly turn to the parallel market, where exchange rates better reflect market realities, albeit at a premium.
The RBZ has faced constraints in funding the interbank market at previous levels, adding to the pressures on the parallel market.
In 2023, the RBZ injected a monthly average of US$60 million, yet by year-end, formal market bids had experienced a three-month lag. As demand continues to outstrip the foreign currency available through formal channels, the parallel market rate soars, pushing up costs for businesses that, in turn, pass these costs onto consumers. Rising import demands further strain the market. Imports reached US$6,84 billion in the first nine months of 2024, up from US$6,66 billion in the same period of 2023, deepening the trade deficit amid softening exports.
With exports totalling US$5,16 billion from January to September 2023, compared to US$5,14 billion for the same period in 2024, the imbalance puts persistent pressure on the exchange rate and stokes inflation. The RBZ's interventions in the foreign currency market, while well-intentioned, have not fully addressed the underlying issues of supply and demand mismatches.
As aforementioned, the dominance of formal players in the interbank market and the exclusion of the informal sector lead to volatility in the exchange rate and increased reliance on the parallel market. This, in turn, drives up prices and contributes to inflationary pressures. To achieve a more stable exchange rate and control inflation, the RBZ needs to consider more inclusive measures that cater to the entire economy, including the informal sector.
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Short-term forecasts for Zimbabwe’s foreign currency market and economic stability remain challenging. The RBZ’s periodic interventions offer only temporary relief in the face of continued import needs and seasonal foreign currency spikes. Without structural changes to integrate the informal economy into the formal market, these imbalances are likely to persist, with inflationary pressures compounding.
In the immediate term, businesses operating in Zimbabwe will need to navigate these challenges by optimising their foreign currency management strategies. This may include securing foreign currency through both formal and informal channels, managing exchange rate risks, and passing on higher costs to consumers where necessary.
Additionally, the government and RBZ will need to explore policy measures that can improve foreign currency supply, such as incentivising exports, attracting foreign investment, and reducing import dependency through local production initiatives and policies that support local formal retail sector. To mitigate the impact on inflation, it will be crucial for the RBZ to adopt a more holistic approach that considers the needs and dynamics of both the formal and informal sectors.
This may involve expanding access to the interbank market for informal sector participants, implementing targeted support measures for vulnerable groups, and enhancing transparency and efficiency in foreign currency allocation. While, on paper, the RBZ may argue that anyone is free to participate on the interbank, in practice bids from informal economic players are rendered as less priority. This is despite the fact that informal players are among the highest importers in the country, and the biggest drivers of the parallel exchange rate, which affects exchange premium and subsequently, inflation.
Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — twdumah@gmail.com or tinashed@equityaxis.com, Twitter: TWDuma_
