Currency crisis explained


    The implication of a Zimdollar freefall is that it catalyses preference for a more stable currency, consequentially spurring demand for USD basically as a store of value despite the controls on it as a medium of exchange. The predictable southward movement of the Zimdollar creates expectations and these expectations are priced into products through upward price adjustments as producers seek to hedge against further value loss. Looked at from a consumer spectrum, the rationale being, anticipating further weakness in the exchange rate, equally anticipates higher inflation due to the visible adverse relationship between the 2 aggregates over last 12 months. This anticipation drives consumers to escalating demand on the short term end, thereby putting pressure on price as supply lags.

    Agents are either buying cash or buying goods in abnormal quantities to counter the impact of inflation borne out of the tumbling exchange rate. These imbalances have given room for market manipulation by rent seekers which is a typical practice under the prevailing circumstances. In fact, generators of forex, are holding on to the forex for the longest time possible and if they are disposing they are seeking top dollar for the disposal. On the other hand, holders of RTGS, notably those holding on to huge sums, are seeking to convert their balances into hard currency within the shortest possible time to preserve value. These moves on either side naturally causes higher demand relative to supply (forex), thereby again drive the value of forex upwards.

    The theoretical valuations of the Zimdollar are showing a gross undervaluation to the USD, using both the purchasing power parity and money supply methodologies. Combined to the earlier narrative, it shows that the market has huge confidence deficit and this confidence is further eroded as the Zimdollar sinks. Lack of confidence is therefore the biggest driver of Zimdollar discount to the US dollar and it is critical that it be restored to salvage the Zimdollar value. In his 2019 Mid Term Budget Review, Mthuli Ncube adjusted the national spend from $8billion to $18 billion and expected a deficit of $3.5 billion. He promised to finance the deficit through non-inflationary methods, whatever that means. On the outset, the initial budget on November 2018, was issued under the pretext of 1:1 while the Mid Term Review was announced at a time the exchange rate was circa 1:8. The Zimdollar has since then lost twice as much value.

    This weakness in exchange rate which feeds into inflation, naturally increases government’s cost base across sectors and this may result in a over-expenditure beyond budgeted levels. It has been Equity Axis’ position that the deficit levels at full year will surpass $5 billion and given this wider position results in more roll out of TBs and a 35% increase in money supply by mid of next year. The growth in money supply would typically drive both inflation and the exchange rate into further worse off levels.


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