- Zimbabwean dollar experiences consecutive weekly depreciation after contentious election
- Concerns arise about investor confidence in struggling economy
- Currency depreciation ranks highest in approximately six weeks
Harare- The Zimbabwe dollar experienced a depreciation today, marking the second consecutive week of decline against the US dollar. This follows the contentious election, which has heightened concerns about investor confidence in the already challenged economy.
Zimbabwe conducted polls on the 23rd of last month, which extended until the 24th, leading to questions about the legitimacy of the election in accordance with the country's constitution and the principles of the Southern African Development Community (SADC).
The Zimbabwean dollar, which was at ZWL4604.6233 against the US dollar last week, experienced a decline to ZWL4647.9681 this week. This represents a further depreciation of approximately 1%, firming the highest depreciation observed in nearly six weeks.
Before the election, the depreciation of the Zimbabwe dollar was attributed to two main factors. Firstly, fiscal mismanagement by the government, characterised by a failure to adhere to prudent financial practices and live within its means. This fiscal instability contributed to economic uncertainty and negatively impacted the value of the currency.
Secondly, behavioural economics played a role in the depreciation of the Zimbabwe dollar. There was a lack of confidence in both the currency itself and the government's ability to effectively manage the economy. This lack of trust and confidence among market participants led to a decrease in demand for the Zimbabwe dollar, further contributing to its depreciation.
However, despite these underlying factors, it is noteworthy that the depreciation of the Zimbabwe dollar following the recent election was relatively minor compared to previous election cycles, such as those in 2002, 2008, 2013, and 2018. This indicates that the impact on the currency immediately post-election was less severe in comparison.
What can be observed from this situation is that the primary underlying issue is not a lack of confidence or behavioural economics, but rather fiscal mismanagement characterised by imprudent policies. Historically, leading up to elections, the government has engaged in expansionary fiscal measures such as injecting additional money into the economy to fund its operations.
This has been achieved through imprudent practices such as excessive printing of surrender portions provided to exporters and untimely payments to suppliers. Consequently, these actions have increased the liquidity of the Zimbabwe dollar, resulting in a substantial increase in the aggregate supply of the currency.
However, due to the prevailing lack of trust and confidence in the economy, the demand for the Zimbabwe dollar remained low. This imbalance between the high supply and low demand for the currency has led to its depreciation.
In the period leading up to the recent election but before May, the government pursued a reckless approach of extensively printing money to finance its projects. This resulted in a significant increase in the liquidity of the Zimbabwe dollar.
In response, the market reacted by rejecting the devalued currency and seeking refuge in the US dollar as a means to safeguard their assets. However, a change in strategy occurred following the introduction of a gold-backed token and the government's commitment to fiscal prudence in order to gain favour with the electorate. Under the leadership of President Mnangagwa, a shift in approach was implemented. As a result, the availability of the Zimbabwe dollar became scarce, leading to an increase in demand for the currency.
This shift in market dynamics resulted in the appreciation of the Zimbabwe dollar starting from the month of June. This demonstrated that behavioural economics, characterised by the preference for a more stable currency, can be mitigated when sound economic policies are maintained and economic sanity is prioritized.
However, the primary concern is whether the perceived stability in the post-election period can be sustained over the long run. Initially, the government has successfully maintained the official exchange rate and stabilized the parallel market rate.
However, upon closer examination of the disparity between these two rates, a noteworthy discrepancy becomes apparent. The parallel market is currently trading at a rate of ZWL7k to ZWL7.5k per dollar, while the formal market rate stands at ZWL4.6. This represents a substantial premium of 38% between the two markets. This significant difference raises suspicions and suggests the presence of irregularities or questionable practices in the currency exchange system.
Based on this raw data, it appears that there is a form of regulation in place within the official market, which allows for wider margins compared to the black-market rate. This suggests that the stability observed in the official market may not be genuine but rather artificially maintained. It can be likened to attempting to control diarrhoea by stitching up the back, which is a temporary measure that may not be sustainable in the long run.
The recent appreciation of the Zimbabwe dollar seems to be attributed to the suspension of the complete payment of the 25% surrender portions. This can be observed through the increase in export receipts, which are totalling over US$500 million on a monthly basis. If the full 25% component of these receipts were paid upon delivery, it could potentially provide sufficient Zimbabwe dollars to compete with the US dollar. However, the deliberate decision to halt these payments has temporarily helped to contain the depreciation of the Zimbabwe dollar.
Furthermore, it is important to note that the government has not yet fulfilled its obligations to pay exporters. Once these payments are made, it is expected that a significant influx of Zimbabwe dollars will enter the market. This can potentially have a substantial impact on the exchange rate. For instance, there are numerous infrastructure projects along Bulawayo Road that remain unfinished or abandoned. This suggests that suppliers involved in these projects have not received payment, leading them to halt operations. Once these suppliers are paid, it is anticipated that the exchange rate will experience a sharp increase.
This highlights the fact that the current stability observed in the market is not driven by genuine market forces, but rather is a deceptive form of stability. In the long run, this approach is unlikely to be sustainable or effective in addressing the underlying economic challenges.
However, the government is aware of this situation and in order to prevent panic in the market, it is expected that the government will make payments to suppliers and exporters in smaller instalments. This approach aims to avoid a sudden influx of excess money into the market.
Additionally, we anticipate that the construction industry will experience a slowdown. This is because, in order to maintain the stability of the exchange rate given the weak economic fundamentals, the government needs to reduce the pace of its construction projects. This is done to balance the overall supply and demand of the Zimbabwe dollar.
However, it is important to note that these measures are temporary and can only provide short-term stability. In the long run, there is a risk that the currency will face significant challenges and potentially experience a rapid devaluation.
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