• The local unit shed 3% to ZWL881.7513
• YTD loses widen to 24%
• Zimbabwe dollar is expected to continue falling due to a mismatch between forex and ZWL’s demand and supply

Harare- The local unit continues to lose ground against the US dollar despite government talking a rhetoric of stability. The cumulative year to date (YTD) losses  have breached the 20% mark after shedding by 3% on the latest Foreign Exchange Auction Market(Auction Market) held on the 22^nd of February 2023.

The Zimbabwe dollar traded at ZWL881.7513 from ZWL856.8403 last week widening month to date (MTD) losses by 9%.

Both cumulative YTD and MTD losses against the greenback marks the unit’s worst performance since its reintroduction in 2019 reigniting the 2008’s hyperinflationary memories. Since its reintroduction in 2019, the Zimbabwe dollar has been decreasing at an increasing rate despite measures taken by the authorities to bring stability.

Disparity between the parallel market rate (PMR) and formal rate continues to grow signalling a total demise of the embattled currency.

The parallel rate has been steadier since the resumption of auction trades but rose wild, breaching the 1000 mark before the new year a period over which the auction market was on break and government paid its contractors.

The movement is largely indicative of a market in disequilibrium, a mismatch between demand and supply of both local currency and the US dollar. The local currency is increasing its presence in the market due to inflation-adjusted salaries by the companies and government to its suppliers. This is growing demand for the US dollar which is used as a hedge against the weak Zimbabwe dollar. 

Instead of stabilising the parallel market rate, a look at the ZWL performance on the Auction Market shows it is pacing up to the parallel market rate.

The relationship between the two shows a holistic approach of the two markets in the provision of foreign currency into the market. However, it is an indication that the formal market has no capacity to satisfy demand by itself.

Data shows that the parallel market premium has hovered between 100% and over 19% between 2022 and 2023 indicating high inflationary pressures and rapid depreciation of the local currency. 

Wider premiums are a disincentive for exporters as they widen losses on surrender portions which currently stand at 25%. 

This disincentive leads to production cuts and losses to exporters. With higher premiums, the auction market will always feel the pressure to ease at higher rates, resulting in higher volatility. The aim in a highly informal economy should never be to eliminate the parallel market, but rather to ensure that there is a good degree of supply channelled through the formal market at least sufficient enough to cover the critical sectors of the economy. 

Readoption of dollarisation amid 70% of local expenditures being carried in US dollars help in rechannelling liquidity.

Wider premiums between the formal and PMR are expected ahead of the 2023 general elections as the government will be forced to pour more into the market through payment of contractors and funding other election campaign projects. 

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