- The local currency depreciated by 26%
- This is the biggest crash in 2023 as the currency crisis continues
- The biggest culprit is excessive ZWL liquidity in the market
Harare- The embattled Zimbabwe dollar continued on a freefall after depreciating by another record 26% on the RBZ-governed Auction Market held on the 23rd of May 2023. This was the biggest weekly decline since the beginning of the year after shedding 14% last week.
The Zimbabwe dollar moved to ZWL1888.0119 from ZWL1404 last week. The Zimbabwe dollar’s record weekly decline was 33% in May 2022.
The latest weekly decline widened year-to-date losses by 64%, a record decline since the reintroduction of the Zimbabwe dollar in 2019.
However, the rapid depreciation of the local currency indicates a glut in Zimbabwe dollar liquidity through the issuance of Treasury Bills by the government despite the Central Bank holding the rhetoric of a tight monetary policy stance.
The logic is simple, when there is an excess of the Zimbabwe dollar in the market, the demand for the greenback hype and the opposite is equally true. This denotes that the Central Bank is not sleeping, pumping more money into the economy.
For instance, in March 2023 alone, government securities through treasury bills were valued at US$1.4 billion, equivalent to about 30% of the national budget and 50% of March 2023’s M1 (currency, demand deposits, liquid assets). This glut in Zimbabwe dollar liquidity is the key culprit in weakening the Zimbabwe dollar. Fiscal indiscipline remains the key determinant of the Zimbabwe dollar's fate.
On the other hand, the parallel market rate was pegged at ZWL3500 against the greenback while peer-to-peer was quoted in the range of ZWL3000-3500 against a single greenback. This almost doubles the official rate used by the government to pay employees, suppliers and companies through the 25% retention threshold.
A new survey conducted by Competition and Tariff Commission, the National Competitiveness Commission and the Consumer Protection Commission found exchange rate volatility and fiscal indiscipline as key culprits for the free-fall of the Zimbabwe dollar.
On fiscal indiscipline, the report said, “Government should carefully manage large payments to contractors to avoid surges in local currency liquidity”.
However, the greatest pinch is felt by the exporters who surrender 25% of their foreign proceeds to the RBZ in exchange for the Zimbabwe dollar using the auction market rate. Research conducted by Competition and Tariffs Commission showed that suppliers were quoting their services using the parallel market rate while others have completely favoured the US dollar to preserve value. This assertion was initially said by First Mutual Properties in its Q1 trading update for 2023.
This means exporters are losing 50% in revenue through the surrender thresholds, dampening production and productivity. Mining is a business that requires a big chunk of forex as their electricity bills and importation of key raw materials demand foreign currency.
Such a scenario downsizes an economy. As production declines, export value also declines meaning more pressure for the greenback will remain. According to RioZim, a mining firm, it would be better for government to scrap the retention thresholds during a turmoil economic environment like this when the local currency is in a free fall.
The government has been battling to instil stability in the Zimbabwe dollar since 2019. However, the policies continue to fall short. In 2023 alone, three relief packages were released to save the ailing currency. The government said it will continue tightening the money supply where however, the market is telling something. The second package was the introduction of the gold-backed digital coins and the last package was released on the 11th of May 2023 by Professor Mthuli Ncube which saw duty scrapped on some products.
However, all these are yet to show their impact.
This is because there is a serious confidence deficit in the currency. Trying to stabilise something that people have no confidence in is more like trying to draw a perfect square circle, or make 1 a 7. The government continues to scratch where it is not itching.
Policies will only find momentum in a stable economy, and this is not so due to the Zimbabwe dollar crisis.
Under such conditions, Zimbabwe needs stability FIRST and then rethink our economy. For stability, the nation needs any stable currency and the most accepted is the US dollar.
All the measures the government is trying to implement have been implemented since the Black Friday of 1997, 1998 during the DR Congo war, 2006 when three zeros were slashed, in 2008 when price controls were introduced. These same policies were introduced in 2019 but to no avail. In 2022, price controls were introduced by forcing companies to use the overvalued auction market rate when pricing their products.
Without addressing fiscal indiscipline through government securities (TBs), and quasi-fiscal activities, there is no stability to talk about.
The only imminent solution to ensure stability is dollarisation for a short-term and talk of Zimbabwe dollar later.
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