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Widening premium gap reflects market instability

Interbank market bids and rates

AS the year draws to a close, the Zimbabwe dollar continues to show gross but subsiding weakness against the greenback.

On the auction market this week, the local unit pared 1% to extend its losing streak, whose loss margin has widened over the past two weekly sessions.

The weekly loss margin has worsened to an average of 1% over the latest three weeks from 0,4% in the seven weeks before that.

However, despite widening, the margin of losses are not commensurate to compensate or close the gap reflected by the parallel market.

The parallel market gap has widened to 36% in the latest session from a low of 15% in October.

 The widening premium gap reflects market instability and sustained downside pressure.

This could be emanating from increased festive season demand and relatively higher cyclical government expenditure in the last quarter of the year.

Both factors have consequence of raising demand for forex if all other factors are assumed to be constant.  

What government has done

Measures introduced in May 2022 were designed to cushion the rate of currency decline thus providing support for the currency.

Some of the measures have since been scrapped or loosened while others have remained.

The most notable measures include introduction of gold coins as a Zimbabwe liquidity siphoning mechanism and the increased liberalisation of the currency market to allow market discovery leading to currency stability.

Government, however, maintains a grip on forex receipts through retention threshold, a factor now driving companies to the VFEX.

These measures buttress a deliberate effort to instil fiscal discipline, which in some instances has failed to be adhered to.

Some of the critical issues influencing the direction of the currency are a slow growing economy.

Although the country achieved a 7% growth in 2021, the effective post dollarisation average growth is in the negative.

This means that the economy has contracted from dollarisation into post dollarisation.

While this has happened, the stock of local currency has gone up at a rate faster than the growth of foreign currency balances.

If the economy is broadly going to grow faster, it would allow for a more effective currency stability, which is fundamentally supported.

It is worth noting that the country's export receipts have significantly increased scaling beyond the US$10 billion mark for the first time in 2021.

This has largely been due to higher commodity prices and ramped up production together with Covid-19 induced formalisation of remittances.

These trends are likely to continue into 2022.

Where government is getting it wrong and what needs to be done

The status quo is unsustainable and the 2023 budget gives every reason to be worried about the future of the economy and specifically the Zimbabwe dollar.

Ramped up expenditure has an inflationary impact on the economy.

On the other end, there is no sustainable stability, which can be realised without growth.

It's a catch-22 where caution and careful study of payoffs has to be done.

The government is desperate to reignite effective growth post the austerity period while at the same time is angling to decisively deal with inflation and currency stability.

Growth is unavoidable if the currency is to be stabilised. It is the nature of the growth which is important to look at.

The required growth is supposed to emanate from private sector led investments and not government.

Government will need to work on its fundamentals, which include institutional reforms.

An enabling environment will drive private investment from within and without.

A broader economic restructuring can give way for external debt resolution.

The challenge with organic growth

Based on the developments of the last two years, it is clear that government is pursuing an organic growth model leveraging own resources.

This strategy is not sustainable and risk frequent currency volatility.

As has been the case, this model is not only tapping from own resources but local borrowings.

These have increased the money stock through interests abating currency implosion in the past.

Own resources have also meant a pay-off in social services and its delivery.

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

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