Set winter prices imply government projects 1:50 exchange rate by July

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  • Government implicitly sees exchange rate falling by almost 100% in 3 months
  • Producer prices set on Tuesday guides the projection
  • Formal exchange eases by over 20% after Reuters goes live

Harare – New set producer prices for wheat, suggest that the government of Zimbabwe sees the exchange rate closing the first half at about 1:50 in favour of the USD.

The exchange rate as at Wednesday had since depreciated to 1:25 from 1:18.6 on Tuesday, a move seen as cautiously realigning to the Reuters trading platform which went live today.

Today’s interbank was set to break record as the biggest 1-day plunge in the Zimdollar since September 2019, a time around which RBZ reinstituted controls to save the rate from crushing.

According to cabinet’s latest sitting, government decided to revise producer prices for a number of crops for the umpteenth time and this time winter wheat which is to be harvested around mid-year will be procured by the state for ZWL$11,800 per tonne of produce, the premium quality will fetch for ZWL$14,100.

The rationale in setting prices for producers is to set a market price that encourages both local production and discourages millers from sourcing outside the country.

The two desires are therefore satisfied by finding a price that matches the import parity or slightly higher factoring the low local yields.

Following this line of thinking, the import price for winter wheat is presently at circa US$250. Government would therefore normally want to track this price in local currency to compensate farmers in line with costs as well as to attract local procurement.

A price of $11 800 is therefore seen as tracking US$250 around the time government intend to pay for the produce. This then gives an exchange rate of 1:48 by end of June, a possible target exchange rate for government.

Asked where he sees the exchange rate stabilizing, the Minister of Finance dodged the question and responded that he has learnt from the past that projecting does not work and that he would rather focus on measures to stabilise the rate.

In the past RBZ Governor has said the exchange rate would stabilize at below 1:8, a sentiment shared by the Permanent Secretary of Finance, the Minister of Finance, MPC member Eddie Cross, among other government functionaries.

What the above evaluation shows is that government is projecting a worse off outturn for the exchange rate although this measure, according to Equity Axis’ analysts, is very conservative. The parallel rate which is presently hovering slightly above 1:40 is seen worsening and with liberalization of interbank, expected to continue dictating pace.

Equity Axis News

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