• The Zimbabwe dollar depreciated by 0.4% in the latest auction market
  • The premium narrowed from 43% to 40% compared to the previous week
  • Is this a genuine positive trajectory?

Harare- The Zimbabwe dollar maintained its depreciation rate of 0.4% during the latest auction market held on October 31, 2023. This resulted in the massaged currency being traded at a rate of 5718.4090 against the US dollar.

This marginal decline in performance per dollar also led to a narrowing of the premium, reducing it from 43% last week to 40%.

Despite the strengthening of the US dollar against major currencies, including gold, the Zimbabwe dollar is gaining traction. This is noteworthy considering given that US Dollar is a liquid safe-haven asset used during times of global economic uncertainty, a merit Zim dollar does not hold.

The fact that the Zimbabwe dollar is gaining traction against the US dollar amidst declining export proceeds and foreign currency shortages raises important questions about the underlying factors at play. While it may indicate some level of stability or confidence in the local currency, it does not necessarily imply that the government has completely resolved the challenges it faces, including confidence deficit and policy slippages.

In fact, the apparent appreciation of the Zimbabwe dollar against the US dollar since July 2023, despite unfavorable economic fundamentals such as high inflation, unemployment, and a persistent foreign exchange deficit, raises questions about the underlying factors supporting the currency.

As a way to please the electorate, the government has implemented a strategy that involved delaying payments to exporters, aiming to enter the election phase with the appearance of a stable currency. This trend is still ongoing. By intentionally withholding timely payments to exporters, the government has effectively limited the availability of the local currency, while increasing the concentration of US dollars in circulation.

This deliberate manipulation of liquidity has resulted in a surge in demand for the Zimbabwe dollar to cater for the local obligations like the then 50% corporate tax in Zim dollars. The heightened demand, coupled with the increased concentration of US dollars, has temporarily bolstered the value of the Zimbabwe dollar against its American counterpart.

Furthermore, the government implemented a strategy of delaying payments to suppliers and postponing construction projects. This approach created a scarcity of the Zim dollar and increased its demand. That is why ongoing projects such as the Domboshava Road and major rehabilitations along Bulawayo Road have not been completed, as this trend continue to persist.

Another approach employed was raising interest rates significantly, reaching levels as high as 200%, 150%, and currently 130%. The intention behind this is to limit credit creation in Zimbabwean dollars and address arbitrage opportunities. However, it raises concerns about the sustainability of a country with borrowing rates as exorbitantly high as 130%. Such rates are detrimental to productivity by impeding access to productive borrowing.

The ability of a country to endure with borrowing rates of this magnitude is questionable, as it restricts businesses and individuals from obtaining affordable financing for investments and operations. It hampers economic growth and development by discouraging productive borrowing, which is essential for stimulating economic activity.

Additional methods employed include covert injection of foreign exchange into the auction system through unfunded sales, as well as the excessive issuance of non-negotiable zero-coupon bonds. These practices aim to artificially stabilize the currency and create the perception of stability, but they fail to address the fundamental challenges facing the currency.

The hidden injection of foreign exchange into the auction system through unfunded sales involves supplying foreign currency without adequate backing, which distorts the true value of the currency and undermines market forces. Similarly, the excessive issuance of non-negotiable zero-coupon bonds can create an illusion of stability by temporarily boosting government revenues, but it does not address the underlying economic issues.

Will this work

Such short-term benefits can be derived from this approach, but the lack of support from market fundamentals raises concerns about its long-term stability. The presence of an unregulated economy comprising 88% of the total, along with an impending energy crisis, confidence deficit, foreign exchange deficit, high unemployment rates, and political instability, suggests that the currency is at risk of experiencing a substantial devaluation.

The current solutions being implemented can be likened to temporary fixes that fail to address the root causes of the issues at hand. Consequently, it is only a matter of time before these solutions prove ineffective and the situation worsens.

Already, the Zim dollar is currently experiencing a significant depreciation phase, as evidenced by the escalating parallel market rate. In just a few months, the rate has surged from a low of 6000 in July to a high of 8500 in October against the US dollar.

The combination of unfavorable commodity prices, an impending electricity crisis, and a controlled auction market paints a worrisome picture for Zimbabwe's economic future. Unless there are substantial changes to the existing conditions, the country appears to be heading towards a severe economic downturn.

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