• The currency appreciated by 17%
• This is the best performance since 2019
• Number of bids declined from 35 to 11

Harare- The Zimbabwe dollar has appreciated to ZWL5395.9619 on the latest auction market held on the 4^th of July 2023, notching up 17% gain from ZWL6326.5877 traded last week per dollar.

This is the biggest appreciation since the Zimbabwe dollar was reintroduced in 2019 and the auction system in 2020. The Zimbabwe dollar gained 9% last week against the greenback and the latest appreciation has taken two-week gains to 26%.

From 35 bids last week, number of bids received dropped to 11 and with US$20 million on offer, US$4 million was allotted. A decline in bids and allotted funds means waning demand for the US dollar.

This is attributed to the government's efforts to manage liquidity. The Reserve Bank of Zimbabwe and Finance Ministry have been limiting the Zimbabwe dollar liquidity to spur its demand and control inflationary pressures. Money supply has been tightened leading to growing demand for the ailing currency.

The auction system has brought a level of transparency to the foreign exchange market, which was previously characterised by a lack of transparency, overvaluation forcing an overreliance on the black market. This has helped to stabilise the Zimbabwean dollar and increase its demand.

The Reserve Bank of Zimbabwe has also implemented several monetary policy measures that have helped to support the value of the Zimbabwean dollar. These measures include the introduction of a liberalised foreign currency auction system, the 50% payment of June taxes in Zimbabwe dollars, introduction of gold backed tokens to mop up excess liquidity and tightening money supply.

However, the high cost of doing business in Zimbabwe has contributed to higher prices despite appreciation. This is attributed to factors such as energy challenges, high taxes, and regulatory burdens. These factors can increase the cost of production, which can be passed on to consumers in the form of higher prices.

Inflationary pressures also remain a big risk. Despite government incompetence, high levels of inflation can be self-perpetuating, as businesses and consumers adjust their expectations and behaviour in response to rising prices. This can lead to a cycle of rising prices and inflation, even if the underlying causes are addressed. This has been observed in Venezuela and Nigeria, where high levels of inflation have persisted for extended periods, despite efforts to control them.

There are several factors that the government could address to support the appreciation of the Zimbabwean dollar and stabilise prices. Government needs to address supply chain disruptions by improving infrastructure and logistics systems. Supply chain disruptions can result in shortages and price increases, which can contribute to inflationary pressures and a weaker currency. Improving logistics infrastructure can support economic growth and reduce costs for businesses, which can help to stabilise prices and support currency appreciation.

Government needs further to address the high cost of doing business in Zimbabwe by implementing policies aimed at reducing regulatory burdens, improving access to finance, and promoting competition. Reducing the cost of doing business can support economic growth and improve competitiveness, which can help to stabilise prices and support currency appreciation.

Furthermore, there is a need to address the underlying structural issues in Zimbabwe's economy, such as low productivity, weak institutions, and political instability. Correcting these issues can support economic growth, improve competitiveness, and support currency appreciation over the longer term.

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