Independent Editorial|THE Zimbabwean dollar this week continued its downward spiral after a momentary lull last week after 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 balance of payments, level of inflation, level of interest rates, level of government debt and political environment results in a weak currency.
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 a 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.
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 channeling 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.
The central bank has strongly denied it participates on the forex black market.The central bank last week froze the bank accounts of a local fuel company, Sakunda Holdings, and the country’s largest automobile dealership, Croco Motors and all its associate companies and.
“As we carry out further analysis, you are directed to freeze, with immediate effect, all accounts held in the names of the listed entities until further notice,” said the Reserve bank order.
Although the central bank did not specify why this action was taken, it was felt the companies could be using Zimdollar accounts to buy foreign exchange, which fuels downward pressure on the local unit.
Some economists believe that restoring confidence in the nation’s currency hinges on improving economic governance and on the government and opposition coming together in a constructive political dialogue to address a worsening economic crisis marked by soaring inflation, stagnant wages and shortages of fuel and other essentials.
Zimbabwe’s rapidly depreciating currency is a stark reminder of 2009, when hyperinflation forced the government to abandon the Zimbabwean dollar in favor of the US dollar and other foreign currencies.
The Zimdollar has been besieged by speculation since it was introduced in February.
In June, the government outlawed the use of foreign currencies in local transactions in an effort to stem speculative attacks on the Zimdollar, but faith in the homegrown currency continued to founder.