Zim’s currency woes: So near yet so far
IT is now 17 straight weeks since the foreign currency interbank market resumed trading after almost three months of suspension. In the latest week, the Zimdollar marginally recovered by 0.003% taking its strengthening tally to seven straight weeks. Over the latest seven weeks the Zimdollar has gained 2,53% against the US dollar. e gains came after 10 weeks of depreciation over which the local unit shed 31%. e bids trend for the period show a tightening bid spread which reduces volatility as well defines a range. Another technical aspect worth looking at is the bids allotments which refers to the total amount allocated to total bids. A total of US$27,4 million was allocated in the week under review, up from US$26,1 million in the previous week. e average of funds traded on the interbank market has increased from US$15 million in the first 10 weeks to US$23 in the latest seven weeks. Given that there has been an 100% bid satisfaction rate over the latest seven weeks, a reference to the total amount demand compared to the total amount supplied, the allotment performance shows a market with both rising demand and supply levels.
Stockpiling ahead of the festive season is one of the major drivers of demand, but also a key element is the source of ZWL liquidity for importers seeking increased forex allocation. Rising demand reflects increasing local currency balances in the economy in absolute terms. e aggregate of money supply is closely watched given its high impact on exchange rate performance. It would be worrying to note a sustainably increasing overall bids size given an expected double digit decline in GDP. On the other hand, matching supply levels shows a market with possible sufficient capacity to absorb demand, but as we will discuss later, the aggregate is yet to fully stabilise. e supply capacity is tapped largely from export proceeds. Total exports receipts for the 8 months period to August are 3.8% higher than the same period last year, thanks to spiking global gold and palladium prices. e net external trade position is also looking more favourable given the slowdown in imports. On the net, the net trade gap of -$0,4 billion compares more favourable to a deficit of -$0,7 billion over the same period last year. e country’s BOP position has been boosted by a spike in remittances motivated by Covid-19 travel restrictions.
e RBZ says more than 60% of the interbank market trades are being matched by exporters and this is encouraging. e Bank however periodically plays on the market both as a buyer and a seller. e Central Bank’s trading smoothening function is almost universal but what differs is the source of liquidity. Most Central banks utilise reserves to cushion volatility in currency markets. In the case of Zimbabwe, the country does not hold any reserves and juggles between surrender portions from exports and external borrowings. e latter are largely unsustainable especially when economic growth is stunted or declining. From the chart, we observe that the top bid has been going up over the latest three auctions and at the same time the lower bid has also increased but at a slower pace. As an indicator, given a more stable weighted average weighted exchange rate as realised over the last seven trading sessions, the surge in both the lower and higher bid represent exchange rate pressure. Given the statistic, it is more likely that the mid-rate would begin going up (ZWL losing ground against the USD) over the next two-week period. In the period over which the ZWL recovered more against the USD, the bid spread was visibly narrowing.
e biggest question presently is on whether the local currency has stabilised, is stabilising or is yet to stabilise. ese questions have dominated economic discourse over the last few weeks. From the observed trend, it is really tempting to conclude that the currency has stabilised but economics is more than what the meets the eye. e supply of forex is not yet fully stable. Banks are taking contingency action to yet again separate nostros between locally generated and inbound export generated flows. is distinction comes on the backdrop of cash withdrawal challenges particularly for holders of locally generated foreign currency.
e selective approach implies that the USD transacted between locals is not the same USD earned by exporters. Consequently, cash dealers are now discounting nostros by as much as 25%, which gives an exchange rate of close to 100 against 81,3 on the formal market and 105 for parallel market RTGS transfer trades. e marginal difference between the nostro discount rate and the parallel rate implies that the 2 are being treated as almost the same in terms of value. Lastly the settlement period for outbound TTs is increasing from the initially set two days up to almost two to three weeks.