- Zim Dollar weakened by 4%
- A second record decline since July
- Parallel Market Rate (PMR) is 31% higher than formal market rate
Harare- On the latest RBZ-governed auction market held on September 26, 2023, the Zimbabwe dollar experienced a weakening, reaching ZWL5252.6558. This depreciation further reinforces the losses from the previous week when it weakened by 6% from ZWL5015.4279.
This 6% decline represents the largest margin since July. The most recent depreciation of 4% marks the second-largest decrease since July as well.
The depreciation of the Zimbabwe dollar after the 2023 contentious elections and the subsequent milestone declines can be interpreted as an indication of increased local currency liquidity. The principle of supply and demand plays a significant role in understanding this phenomenon.
In general, when the supply of a currency increases relative to the demand for it, the currency tends to depreciate. In the case of Zimbabwe, if there is a surge in local currency liquidity, it implies that there is a greater availability of Zimbabwe dollars in circulation.
With an increased supply of Zimbabwe dollars, the market becomes flooded with the currency, making it less scarce. As a result, the value of the currency decreases compared to other currencies or goods and services, leading to depreciation. In this context, the milestone declines in the Zimbabwe dollar's value suggest that the supply of the currency is outpacing gradually the demand for it.
The increase in Zim dollar supply will force it to record lower against the US dollar as market forces will be trying to strike a balance.
The government has commenced payments on outstanding balances owed to suppliers, which has led to an increase in liquidity. Additionally, the government has allocated US$600 million specifically for the 2023/24 farming season. These funds are disbursed in Zimbabwe dollars at the prevailing formal market rate, equivalent to USD. The allocated funds are intended to support the Presidential Agricultural Schemes, including Pfumvudza.
Despite the government's claims that companies fail to fully utilize the weekly offering of US$20 million in the auction market, indications suggest that foreign currency sourcing from the auction market remains unreliable. Proplastics, for example, reported delays in the settlement of bid funds during its half-year period ended 30 June 2023. As a result of such scenarios, companies are compelled to turn to the black market for foreign currency, which further contributes to the fuelling of parallel market rates.
As of now, the parallel market rate for the Zimbabwe dollar is approximately ZWL7000 to ZWL7500 per US dollar, indicating a premium of 31% compared to the official or formal market rate. A premium of 31% signifies a substantial disparity in the value of the local currency when comparing the unofficial and official markets. The significant difference between the two rates suggests that there is higher demand for foreign currency in the informal market, leading to an inflated exchange rate.
Exporters will continue to face significant losses as the 25% component of their payments, which are already delayed, will be settled at a much lower rate based on the formal market. Meanwhile, suppliers are quoting prices based on the higher parallel market rate.
This situation puts exporters in a difficult position. The delayed settlement of the 25% component affects their cash flow and financial stability, making it challenging for them to meet their financial obligations. Additionally, when the payment is finally made, it is at a lower rate determined by the formal market, resulting in reduced revenue for exporters compared to what they had anticipated. This discrepancy between the formal market rate and the parallel market rate can erode profit margins and make it unsustainable for exporters to continue their business operations.
o illustrate the situation further, let's consider the example of company ABC exporting goods worth US$1 billion. Typically, they receive US$750 million in hard currency (US dollars) and the remaining 25% in Zimbabwe dollars (ZWL). In this case, the expected payment in Zimbabwe dollars would be ZWL310 million, calculated using the parallel market rate (PMR) commonly used by suppliers.
However, instead of receiving ZWL310 million, company ABC is given only 250 million Zimbabwe dollars. This discrepancy causes a shortfall of approximately ZWL60 million for the company. As a result, these losses directly impact the profitability and effectiveness of the company.
Despite the rhetoric of a market-determined exchange rate system, it appears that the government continues to exert control over currency markets. This control has shifted from being under the purview of the Reserve Bank of Zimbabwe (RBZ) to now being controlled by the Treasury.
The existence of a market-determined exchange rate system suggests that exchange rates are determined by the forces of supply and demand in the open market. However, in practice, it seems that the government maintains a significant influence over the currency markets. This control has transitioned from the RBZ, which traditionally held authority over exchange rate management, to the Treasury.
This shift in control does not necessarily indicate a move towards a truly market-driven exchange rate system. Rather, it suggests that the government has retained a grip on currency markets, albeit through a different institutional framework.
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