- Zimbabwe Dollar maintains stability with minimal changes in latest auction market
- Informal economy thrives as formal businesses struggle with US dollar shortage
- Comprehensive strategy needed to address currency crisis
Harare- The Zimbabwe Dollar remained relatively stable in the latest auction market held on Tuesday, with minimal changes in its value. The exchange rate shifted from ZWL5738.7217 on November 7th to ZWL5755.7081 this week, indicating a modest decline.
This translates to a weekly decline of 0.3%, which is one of the least significant drops observed for the currency so far this year. The month-to-date decline stands at 0.1%.
Out of the provided US$20 million by the auction, only US$1 million was awarded, indicating that companies were unable to fully deplete the remaining US$19 million. This situation is attributed to the dollarization of the economy, as confirmed by government sources including the Reserve Bank of Zimbabwe (RBZ). These sources indicate that approximately 80% of local transactions are now conducted in US dollars. As a result, the demand for the greenback has dwindled among companies.
However, it is important to note that this analysis may lack practical relevance due to the highly informal nature of the Zimbabwean economy. Formal businesses are obliged to sell their products at the auction market rate, which often results in higher prices when denominated in US dollars. As a result, customers are increasingly turning to informal retailers who are not subject to exchange regulations and frequently evade tax obligations.
Consequently, formal companies continue to face a shortage of essential US dollars, despite approximately 80% of the currency in circulation being US dollars. It is worth noting that the informal economy makes up over 80% of Zimbabwe's overall economy.
However, the question is so how the Zim dollar is not depreciating by greater margins. The current stability has not come on the back of implementation of meaningful reforms or fiscal and monetary discipline but is just the government starving the market of Zimbabwe dollars by not fulfilling its obligations.
The Treasury is yet to pay contractors undertaking ongoing infrastructure projects, settle exporters’ forex surrender requirements, and fulfil financial obligations on RBZ external debt it recently assumed.
Government is creating artificial shortage through a delayal in the payments of exporters' 25% earnings.
Timely payments to suppliers and the resumption of major projects, such as the Domboshava road and Bulawayo Road projects, which were utilized for government campaigns during elections are still on halt. Once these projects are completed, there may be an excess of liquidity in the market.
While some may suggest that the government pays suppliers exclusively in US dollars to address the artificial shortage of the Zimbabwe dollar, there are practical challenges to consider. One major obstacle is the reduced earnings from minerals, which are the country's biggest foreign exchange earner, due to poor commodity prices.
Paying suppliers solely in US dollars would require a significant allocation of foreign currency reserves. However, if the country's earnings from mineral exports are low, it becomes difficult to sustain such payments in the long term. This approach could strain the foreign currency reserves and create further imbalances in the economy.
To address the artificial shortage of the Zimbabwe dollar and promote economic stability, a comprehensive strategy is required. This strategy should encompass key currency fundamentals such as implementing a market-determined auction market, addressing the confidence deficit, and tackling political rights and human rights issues in the country.
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