Volatile exchange rate big threat to economy
‘ . . . galloping to ZW$200 on the parallel market’
THE Zimbabwean dollar will this year depreciate at a faster pace than most projections, underpinned by rampaging black market exchange rates, a research by securities firm Morgan & Co. warned.
Morgan & Co’s paper was released a few days before the Reserve Bank of Zimbabwe governor John Mangudya’s monetary policy statement on Thursday last week. He stuck to a 7,4% growth rate projection announced by government in December, 2020 and estimated that annual inflation will drop to 10% by year end.
The rate stood at a staggering 362% last month.
Mangudya’s optimism was premised around growth in agricultural output following a good rainfall season, financial system stability and sustained fiscal discipline.
But the Morgan & CO. report titled: Zimbabwe 2021 Economic Outlook, appeared to caution the markets that a volatile exchange rate might spark off a surge in inflation beyond official projections and dent an already bleeding economy.
Morgan & Co. had prior to the monetary policy statement doubted the central bank’s ability to cool off currency instabilities that have continued even after the apex bank injected almost US$800 million in cheaper foreign currency to exporters through the foreign exchange auction system from June 2020 to early this month.
“In our view, there is no quick-fix to the currency issues in Zimbabwe and we estimate the parallel market exchange rate to move to ZW$150 by the end of QI (the first quarter) 2021 and then ZW$200 in H2 2021,” Morgan & Co. said.
It predicted the official exchange rate to hold at US$1:ZW$82 in Q1 before spiralling to US$1:ZW$90 during the second half.
In a worst case scenario, the Zimbabwe dollar can trade at US$1:ZW$100 on the official market by the end of 2021, the paper predicted.
Whichever way, Morgan & Co. looked at exchange rate developments, their verdict was gloom — Zimbabwe’s currency will depreciate by significant margins on both the official and backstage markets.
It makes it imperative for the central bank to quickly address lingering drawbacks and stop a further currency bloodbath.
“The official rate will continue to lag the parallel market and maintain a gap of 20% to 40%,” Morgan & Co. said.
“Inflationary pressures will remain while the year-on-year inflation number will be in the triple digits. Economic and political risks in Zimbabwe remain elevated. The foreign exchange market in Zimbabwe has been chaotic over the past years, as it has been characterised by lots of experiments. The concern is that a postCovid era, whereby the economy and business reopen means that the stampede for foreign currency from every corner of the economy remains. As the demand for foreign currency increases, there will be a cost-push inflation phenomenon as food and clothing retailers, as well as other economic agents, incorporate the cost of procuring forex (exchange rate premiums) in their prices. As a result, prices of basic goods will head northwards,” the paper reads in part.
It added; “Government authorities are seen yielding to political pressures and calls for better wages, triggering massive inflation, while an exchange rate crisis is also seen exacerbating pressure on prices. The deterioration of the exchange rate could hit the ZW$200 mark in the second half of the year from current levels,” Morgan & Co. said.
While the foreign exchange auction system has tamed runaway parallel market rates, backstage forex deals appear to regain traction since Zimbabwe went into a Covid-19 lockdown in January this year.
It is difficult to predict if the Covid-19 scourge will be contained soon to close the gaps that have sparked off the return of more trading on the parallel market.
But last week, Zimbabwe began a vaccination programme, with 200 000 doses of Sinopharm vaccine donated by China, which could be the first steps towards a return to normalcy and better exports.
If exports are scaled up, companies may troop back to the foreign exchange auction system for United States dollar requirements and help control the exchange and inflation rates.
“Fears of value destruction of Zimbabwean dollar balances have re-emerged in the broader economy,” Morgan & Co. continued.
“This has been driven by a plethora of factors, such as weak local economics and the negative impact of the Covid-19 pandemic.
“As a result, economic agents are willing to pay huge premiums to convert Zimbabwe dollar bank balances to US dollars. This has an effect of putting pressure on parallel market rates that are currently at ZW$120.”