Zimbabwe dollar further loses value

Zimbabwe dollar further loses value. The Zimbabwean dollar this week continued its downward spiral after a momentary lull last week following the central bank moved to freeze bank accounts of companies believed to be exerting downward pressure on the local currency as more money chased after a few US dollars in the market.

Strong demand for US dollars heightened in the wake of worsening inflation pressures triggered by money supply growth and a rush by both corporates and individuals to preserve value in the current economic environment.

The depreciation of the Zimbabwe dollar against the US dollar has been attributed to growth in money supply as the central bank doles out funding for quasi-fiscal programmes such as Command Agriculture, strong demand, a current account deficit, falling exports, low production — which are militating against the stability of the currency.

Manufacturing capacity utilisation — the percentage of total productive capacity being used — is at about 50% and is seen dropping 15%-20% in the near future as power cuts intensify.

In the first four months, mining output plunged by at least 10% compared to the same period last year owing to power outages. The mining sector accounts for 12%-16% of GDP and more than 60% of Zimbabwe’s export earnings. Loss of confidence in the economy has led the corporate sector to seek safety in US dollar savings.

Major factors affecting the value of a currency are a balance of payments, level of inflation, level of interest rates, level of government debt and political environment results in a weak currency.

In Zimbabwe’s case, all the fundamentals — a balance of payments, inflation, interest rates, size of government debt and political and economic stability — do not support the currency’s stability.In recent years, Zimbabwe has run systemic trade deficits due to a decline in exports owing to low production and lack of competitiveness. Zimbabwe recorded a trade deficit of US$217,40 million in June 2019.

A country with a consistently high level of inflation, high government debt and high default risk, political instability and weak economic performance, will have a weak currency.

Inflation was last measured in June at close to 200% and was on the verge of breaking into hyperinflation territory. The domestic debt was in the region of US$10 billion before government arbitrarily converted to ZW$10 arbitrarily on a 1:1 basis. Other extenuating circumstances that have contributed to the decline of the currency has also been the creation and channelling the ZW$2 billion dollar command agriculture programme proceeds to local companies who have been driving demand for US dollar.



Against such a background, the Zimbabwean dollar, which encompasses the Real Time Gross Settlement (RTGS) dollar as well as bond notes and electronic money balances, has been rapidly losing value against major currency. Last Friday, the currency hit an all-time low of ZW$24:US$1 for electronic money.

Only three weeks ago, around ZW$10 bought one US dollar on the black market. The local unit is also plummeting on Zimbabwe’s managed interbank foreign currency market, which values the local currency more favourably as demand for the greenback firms. As of Friday, it took 14 Zimbabwean dollars to buy one US dollar at interbank exchange rates.

But after the central bank’s intervention, the rate dropped to around US$1:ZW$12 by Saturday. By end of day Monday, the rate was creeping back up again. As of Wednesday, the rate was US$1:ZW$17 and is seen rising again. As of Thursday morning, the rate was US$1:ZW$17,50 with the rate seen rising beyond that.

Black market foreign exchange (forex) dealers believe the Reserve Bank of Zimbabwe might be driving up the value of foreign currencies against the Zimbabwean dollar because the central bank needs foreign exchange to finance critical imports such as food and fuel.

“There has been strong demand for dollars since last week, and we think it’s the Reserve Bank of Zimbabwe who are buying,” a dealer who wished to remain anonymous told the Independent this week.

Source – The Independent

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