- Currency experiences 6% depreciation, a significant decline
- Similar depreciation last observed during May-June free-fall
- Uncertain outlook persists for the currency
Harare- The Zimbabwe dollar experienced its most significant decline, not only after the disputed election but since the start of July, indicating a rise in the injection of Zimbabwe dollar liquidity into the economy. The Zimbabwe dollar traded at ZWL5015.4279, nearing its lowest point in eleven weeks, which was reached on July 4th at ZWL5395.9619.
The Zimbabwean elections carried historical significance, facing significant criticism, including from the Southern African Development Community (SADC), a regional organization. These elections were particularly noteworthy as they spanned two days, primarily due to a shortage of sufficient ballot papers in areas where the major opposition party enjoyed significant support. These circumstances led to heightened political uncertainty, resulting in the suspension of EU funding to the electoral body ZEC on the 19th of this month.
Prior to the elections, the government implemented measures to restrict the flow of currency. These included delayed payments to suppliers, deferring the 25% local currency component for exporters, and enforcing mandatory 50% payment of taxes in Zimbabwe dollars. These actions generated demand for the local currency. However, it is important to highlight that the currency's appreciation was not driven by market forces, but rather by government intervention. The challenge lies in the fact that such interventions are not sustainable in the long run.
The relationship between the supply of the US dollar and the Zimbabwe dollar can be understood mathematically. When the supply of US dollars is high and the supply of Zimbabwe dollars is low, the demand for the local currency increases, causing it to strengthen against the US dollar. Conversely, when there is an abundance of Zimbabwe dollars in the market, the demand for it decreases, resulting in its depreciation against the US dollar. This relationship demonstrates how changes in currency supply and demand can impact the exchange rate between the two currencies.
On a week-on-week basis, the currency depreciated from ZWL4712.1675 on the 12th of this month, marking a 6% decline. This level of depreciation had not been observed since May when the currency market underwent liberalization.
The government has reportedly been making payments to suppliers to settle outstanding balances, which had been largely frozen between June and September in order to support election campaigns. While the government has promised to settle a significant portion of the debt in US dollars, the considerable depreciation of the Zimbabwe dollar indicates that the amount of Zimbabwe dollar injection in the market is significantly higher.
It is worth noting that the Pfumvudza Presidential Scheme and other Agricultural Schemes, which provide agricultural inputs to rural farmers, have already commenced. The scale of these schemes is expected to increase as the summer season progresses.
Thus, the response of the Zimbabwe dollar to market dynamics suggests that the currency market remains heavily regulated by the government. The recent shift from control by the Reserve Bank of Zimbabwe (RBZ), under the RBZ Governor John Mangudya, to control by the Treasury indicates a change in the regulatory authority, but the overall level of regulation appears to persist.
With the ongoing payment settlements and considering the current market conditions, it is anticipated that the Zimbabwe dollar may experience a significant depreciation towards the end of the year.
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