- The PMR shoot to a range of 8000 to 8500 per dollar
- ZWL traded at 5693 shedding 0.4%
- This widens the premium by 43%
Harare- Zimbabwe’s ailing but massaged currency, the Zimbabwe dollar increased at a decreasing rate of 0.4% on the 24th of October 2023 on RBZ’s governed liberalized auction market rate. This marks the smallest decline since the harmonized elections of 2023. The exchange rate stood at ZWL5693.7825 compared to ZWL5668.2204 recorded the previous week.
Lat week, the Zimbabwe dollar depreciated by 1% against the dollar.
In contrast, the modest 0.4% decrease falls significantly short when compared to the substantial premium observed in the parallel market. Peer-to-peer markets indicate an exchange rate of 8000, while the parallel market rate stands even higher at 8500. This wide disparity highlights high liquidity injection of the Zim dollar and the prevailing challenges faced by the official exchange rate in Zimbabwe.
The significant gap between the formal market rate and the auction market rate suggests that the latter is artificially inflated, resulting in an overvaluation of the currency in relation to the US dollar. In contrast, the parallel market rate reflects the true economic conditions and is determined by market forces. This divergence highlights the discrepancies in the valuation of the Zimbabwean currency by government.
The currency manipulation tactics employed include deliberate delays in payment to suppliers, hidden injection of foreign exchange into the auction system through unfunded sales, and the excessive issuance of non-negotiable zero-coupon bonds. These practices contribute to the artificial stabilization of the currency, creating an illusion of stability while masking the underlying currency challenges.
Non-negotiable zero-coupon bonds, also known as zero-coupon bonds or deep discount bonds, are fixed-income securities that do not pay periodic interest (coupon) payments. Instead, these bonds are issued at a discounted price relative to their face value and redeemed at the full face value upon maturity. The difference between the purchase price and the face value represents the interest earned by the bondholder.
The poor performance of companies, resulting from a shortage of foreign currency, serves as evidence for delayed payments to suppliers as they need that ZWL component to bid for USDs on auction. The underlying logic suggests that the auction market is providing a substantial amount of US$20 million, but companies are unable to bid for it in its entirety due to a lack of Zimbabwean dollar liquidity. However, the losses experienced by companies like RioZim and Proplastics due to a deficit in foreign exchange indicate that the Reserve Bank of Zimbabwe (RBZ) may intentionally be postponing payments to exporters to purchase the US$20 million. This deliberate delay creates an artificial scarcity of Zimbabwean dollars and undermines the perception of RBZ's stability in the formal market.
The Zimbabwean government o the 25th of October 2023 implemented a reduction in borrowing rates to 130%, which is expected to lead to an increase in the influx of Zimbabwean dollars.
In addition to the aforementioned factors, the decrease in export earnings by 9% to US$3.6 billion in the first nine months of the year (compared to US$4.5 billion the previous year) will further exacerbate the situation. This decline can be attributed to the falling prices of platinum group metals (PGMs) and other commodities, primarily caused by geopolitical tensions.
All these, weigh on exporting firms as they surrender 25% of their earnings for the overvalued Zimbabwe dollar.
The recent increase in electricity charges to USc12.63 per kWh will have a severe impact on mining firms, particularly considering that electricity costs already accounted for 20% of their operations prior to the price hike.
Over the course of the past 11 months, electricity costs have already risen by 40%, and the latest increase will further escalate these expenses for mining companies. This additional burden is likely to result in significant challenges and financial strain for the mining sector.
Considering the combination of factors such as the high premium rate, declining export earnings, inadequate electricity generation, and elevated electricity charges, the overall economic outlook appears to be increasingly challenging. It is important to note that while non-fundamental measures employed to control the currency may have short-term effectiveness, they fail to address the underlying economic challenges and are not sustainable in the long run.
To achieve lasting stability, it is crucial to shift efforts towards addressing structural issues within the economy. This includes promoting transparency in economic transactions and implementing sound economic policies. By focusing on these areas, the economy can work towards overcoming its challenges and establishing a more stable and sustainable path for the future.
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