Zimdollar tumbles to below the psychological rand levels

HARARE- The Zimdollar traded at below the rand levels on Monday, signifying the first time Zimbabwe’s new currency has fallen below South Africa’s rand.

As at Monday midday, the parallel market exchange rate between the USD and the Zimdollar swept past the 14.5:1 levels, a rate which is commonly referred to as the ZAR/USD long term average exchange rate.

Forex traders at Ximex Mall in Harare had bids of about 1:14 while offers were averaging 1:14.7 for the USD/ZW$ pair.

                     

The Zimdollar has been on a freefall since its return in February as a free-float currency. Further liberalisation of the exchange rate in June saw the exchange drastically fall to beyond forecasted levels.

Some were of the view that Zimbabwe’s exchange rate to the US dollar cannot be stronger than the US/ZAR pair given that South Africa’s economy is bigger and more stable than Zimbabwe.  Zimbabweans typically source most of their basics from South Africa a fraction estimated at 40% of the total consumptive goods.

It was therefore argued that at an exchange rate at par with the USD/ZAR pair, Zimbabwe could track the prices of most goods imported or locally produced to determine fair pricing. Any variance from the import parity price would spell price distortion in the local market after factoring transport costs.

Given full liberalisation, players would be priced out of the market if the variance is not optimal according to this model. Its weakness is however that Zimbabwe’s cost base for local produce is relatively higher given power costs, antiquated machinery and lack of scale in production among other factors.

The model also fails to recognise that as a freely floated currency the USD/ZWD pair may move in either direction independent of price levels in the economy thus it does not guarantee exchange rate stability.

Beyond the rand levels, pundits are ceased to estimate the average price levels over which the exchange rate will stabilise. Initial government forecasts were that the exchange rate would stabilise at around 1:4 times. Eddie Cross, who was instrumental in influencing monetary policy in the formative periods of the current political dispensation was of the view that the exchange rate would stabilise at the above rate.

In a tweet 3 months ago, industrialist and presidential advisor Busisa Moyo, also quipped on the currency matter projecting that the fair value of the local currency was around 5 times to the US dollar.

 He advised that those stocking inventories bought at exchange rates of above 8 times were bound to burnt and will fail to dispose it once the exchange rate comes off. He also highlighted that the market was low on RTGS$ liquidity.

The trio of Minister of Finance, his permanent secretary and the Governor of the Central bank shared a modeled view that suggested an exchange rate of above 5 times was unsustainable. Odds have however not been in policy makers favour as the exchange has gone on free fall.

Although general liquidity levels have been tighter, supply of forex has not been forthcoming even as market makers have largely turned to buyers.

EQUITY AXIS NEWS

 

Respect Gwenzi

Respect is the Lead Analyst and Managing Director at Equity Axis. He has 8 years experience in respective fields of finance and media. Particular areas of expertise include Asset Management, Stockbroking and Financial Media. Respect is on a mission to change the course of Financial Media in Africa through digitalization

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