· ZWL appreciates for the first time this year today against US$
· Appreciation attributed to tightened money supply in formal market
· Currency stability to sustain as long as government remains disciplined
Harare - The local currency, ZWL, appreciated against the United States Dollar (US$) for the first time this year on the 22nd of June, 2023, on the interbank market. The local unit firmed by a staggering 1.26% against the greenback to close at ZWL6,840.55, from ZWL6,926.58 recorded on Wednesday.
Since the beginning of 2023, the ZWL has been on a downward spiral against the US$ on all the currency markets in the country, that is, the interbank market (Willing-Buyer Willing-Seller market), the Dutch Auction market (once the Reuters Auction market) and the parallel market (informal exchange market). Overall, the ZWL has averaged a decline of -1.83% each day since the beginning of 2023 to date. The lowest depreciation margin was a -0.02% recorded on the 22nd of March, 2023, while the highest depreciation magnitude of -24.6% was recorded on the 7th of June, 2023. The 1.26% appreciation recorded on 22 June is the first appreciation recorded this year on all the three currency markets. Meanwhile, the top 5 highest depreciation margins were recorded in May and June of 2023, following raft measures by the Central Bank to curb the runaway inflation and stabilize exchange rate loss. These are also the same measures that have resulted in the pioneer appreciation of the ZWL.
In May of 2023, the ZWL began a massive descent following the issuance of a big chunk of Treasury Bills and rampant money printing by the Reserve Bank of Zimbabwe (RBZ). Later in the same month, the Finance Ministry then announced measures aimed at stemming the currency decline including the reversion to interbank for trading of currency. With it came the introduction of the Dutch Auction system which prioritized highest bidders as opposed to the ordinary Reuters Auction system. This saw the auction market exchange rate diving deeper, recorded a depreciation of -60% in May alone. Following was the floatation of the interbank market by the RBZ in June, with the exchange rate being determined by market forces. This further exacerbated the exchange rate decline.
While the pay-off of the government measures was the runaway exchange rate, the upside was a narrowing down of the premium between the formal and the informal exchange rate from a whopping 115% as of early May to a circa 20% as of mid-June. The narrowing down of the premium meant a reduced appetite for arbitrage seeking on currency markets, which included in it the decrease in speculative borrowing. Another consequence of the reduced premium was the increased participation on the formal exchange market as economic players could fetch the same value in liquidating their foreign balances on the interbank. This then relatively reduced supply of foreign currency on the parallel market, and saw a reduced depreciation margin of the local unit on the interbank. Simultaneously, the Central Bank was also mopping excess local currency liquidity from circulation through the wholesale currency market along with other supportive measures.
Formal reports have indicated that banks and other formal institutions have been recording a decrease in their demand for US$ on the interbank market due to reduced ZWL balances at their disposal. This is subsequent to government’s efforts in pinning down liquidity. Since the government has historically faced more challenges in mopping liquidity from the informal market, the parallel exchange rate will hold ground. Meanwhile, the appreciation of the ZWL and the recent stability of the exchange rate across all markets will only sustain as long as the government remains disciplined in disbursing local currency into the market. With the upcoming elections and uncertainty, government spend will likely grow again, and consequently drive up exchange rate at accelerated margins. In conclusion, the appreciation of the ZWL today is only but reflective of short-lived discipline of the government in tightening money supply in the formal market.
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