‘Zim dollar under siege again’

24 May, 2020 - 00:05 0 Views
‘Zim dollar under siege again’

The Sunday Mail

Business Reporters

The Zimbabwe dollar is once again reeling under unrelenting pressure from speculative activities by crafty individuals seeking personal gain, it has been learnt.

The Reserve Bank of Zimbabwe (RBZ) — through Statutory Instrument 103A of 2020 — introduced new higher denomination notes such as the $10 note released on Tuesday last week and the $20 note that will be released to the market on Monday next week.

The new measures are meant to ease cash shortages plaguing the local market.

In releasing the cash, after a clamp down on errant EcoCash agents, the RBZ Governor Dr John Mangudya said monetary authorities were trying to increase the amount of paper money as it is still below 5 percent of the total amount in circulation.

International best practice, however, dictates that paper money should be at least 15 percent of the money in circulation.

Before introduction of the new notes, the local currency was trading at relatively stable rates on the parallel market, especially for electronic transfers.

Ordinarily, the local currency would have been expected to firm due to the clamp down on illegal activities on electronic platforms.

A firming local unit would have been a boon for both tobacco and cotton farmers seeking a convenient payment method — cash.

However, it is believed that some dealers are using the special dispensation for withdrawals specifically meant for tobacco farmers, some of whom desperately need cash to pay their workers, as a conduit to make large cash withdrawals, which they in turn channel to the black market.

As such, the sustained depreciation of the local currency topped the agenda when the Monetary Policy Committee — an advisory arm of the central bank — met on Friday.

Dr John Mangudya told The Sunday Mail Business that current market fundamentals do not justify such a sustained and marked loss in value since the country is receiving significant inflows of foreign currency from gold and tobacco.

Prospects in the tobacco sector have been particularly bullish. By last week, more than 12,6 million kilogrammes worth US$28 million had been sold, compared to 2 million kilogrammes worth US$3,5 million in the same period a year ago. Gold prices have also been rising on the international market. Dr Mangudya insists there currently is no evidence that cash was leaking directly from banks to the parallel market.

It was plausible, he added, that depositors could have been on-selling their cash after making withdrawals.

Zimbabwe needs at least US$100 million monthly for essential requirements, including fuel and drugs among others.

Two-tier exchange rate

The Confederation of Zimbabwe Industries (CZI) believes that the rate management system is causing exchange rate volatility.

The business lobby group opines that a two-tier exchange rate regime might help stem the tide.

CZI proposed a crawling peg, a variable rate system adjustable by the previous month’s inflation rate, and a truly floating rate based on an independent Reuters System.

It added that any efficient exchange rate regime needed to be complemented by an iron-clad grip on money supply.

With most of Zimbabwe’s productive sectors such as agriculture and manufacturing operating at critically low and constrained levels, dependency on imports has created pressure and speculative demand for foreign currency, especially US dollars.

Demons

The RBZ said the depreciation of the local currency couldn’t be linked to the rise in demand for US dollars as the current national lockdown, which restricts movements and to an extent business activity, would naturally result in subdued demand.

It was clear, Dr Mangudya said, that the exchange rate was being manipulated by cunning and selfish individuals.

“The exchange rate has moved from $44, $45 and $60 to the US dollar. We need to ensure that we put the blame where it belongs. It is because people are manipulating the currency for selfish reasons,” said the RBZ Governor.

“These are ‘geniuses’ at currency manipulation and when we say there is a demon causing problems, we do not mean real demons, we mean the force behind these challenges cannot be touched, but it is there.

“They just wake up and say the exchange rate is $70 today, but who buys at that rate: probably no one, but they just want to push the rate up.

“We have big companies that are mere followers of this and so everyone becomes a follower, that is why I said there is need for contact tracing to see who is causing it; that is, treating it like Covid-19 — trace, isolate and then treat,” he said.

The apex bank has previously attributed suspicious rate movements to illegal foreign currency activities, following local currency withdrawals running into several millions of Zimbabwe dollars.

However, once the excessive liquidity flow into the market was halted, the exchange rate regained relative stability for a brief period before cycles of intermittent free fall began again.

Dr Mangudya said “what we are seeing on the streets are just symptoms of a challenge”.

Government faces the twin headache of ruthlessly dealing with illegal forex traders, who ply their trade on the streets in broad daylight, or crippling firms who fail to get hard currency on the formal interbank.

The central bank believes Zimbabwe needs to focus more on production to cut on imports, save forex and reduce the impact of exchange rate movement on domestic pricing.

The Zimbabwe dollar was reintroduced after a decade-long hiatus following its collapse amid hyperinflationary in early 2009.

Having started at a floated rate of $2,5 to US$1, it has exponentially lost ground until it was fixed at $25 to US$1 in March for certainty of pricing following challenges brought about by the Covid-19 outbreak.

Its depreciation has often resulted in spiralling prices of basic commodities.

Annual inflation was measured at  676 percent by April 2020.

Consequently, the depreciation has spawned need for higher cash denominations to complement $2 and $5 notes.

The central bank has injected just over $1 billion into circulation since September last year in its bid to address cash shortages, which are causing thriving trade in cash, with premiums as high as 30 percent.

The bank targets to increase the total amount of paper money in circulation to 10 percent of total money supply. The cash is being drip fed into the market, with banks swapping RTGS balances for notes.

This is being done to avoid creation of new money that would fuel money supply growth, drive inflation and exchange volatility.

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