- New peak rate of ZWL 88.55:US$1
- 2nd highest number of bids received: 1,683
- Highest bid rate received: 98
- 2nd highest Raw Material allotment to-date: US$ 18.47m
HARARE – The Zimbabwe dollar plunged by the highest weekly margin since the beginning of the year to ZW$88.5532 against the US dollar as the period of extreme currency instability stretches to levels demanding urgent need to address the structural dissonance in economic policy so as to bring about stability.
In last week’s foreign currency auction trade, the Zimbabwe dollar had settled at ZW$87.6653 against the US dollar.
The margins are worse off on the parallel market as the premium has widened to near 100%. It is often argued that the parallel market premium is a useful indicator of real exchange rate misalignment in developing countries.
The official exchange rate appears to be undervalued (overvaluing the domestic currency). The implications which the authorities at the Central Bank obviously know are that an overvalued domestic currency depresses the official current account below its equilibrium, while an undervalued domestic currency may be inflationary.
Managing these dynamics is difficult in economies where the parallel markets for foreign currencies are strong, like the case in Zimbabwe.
Strong demand for foreign currencies, notably the US dollar and the South African Rand, means that businesses often rely on the parallel market to buy the foreign currencies they need to import goods.
However, the gap between the official and parallel markets is widening, with the Zim dollar continuing to depreciate at a faster rate in recent weeks despite the monetary authorities’ indication to use more than half of the SDR funds received from IMF in August 2021 to prop up the currency.
The auction results presented by the RBZ show the second highest number of bids received since the introduction of the auction market last year at 1,1683 with the highest bid received at 98.
The numbers prove a sustained demand for foreign currency, which the Central Bank is struggling to satisfy as proven by a huge forex allotment backlog in excess of US$100 million.
The implications of fluctuating exchange rates on inflation are far reaching. Inflation took an upward trajectory in September 2021, forcing authorities to revise their inflation targets for the year upwards, again.
Whilst the way forward requires the authorities to address economic fundamentals which include desisting from excessive money printing to finance government programmes, The Central Bank has instead shifted blame to individuals alleged as currency manipulators as well as naming and shaming auction market beneficiaries for misusing the funds.
There is also a need to reduce fiscal deficits and achieving balance of payment stability, liberalising foreign exchange markets which will most likely eliminate or reduce parallel market premiums.
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