Zim dollar set for accelerated devaluation
THE Zimbabwe dollar is likely to devalue at an accelerating rate over the coming months as there is little to prop it up, argues one of the country’s leading asset management company, Imara Asset Management (Imara).
According to Imara, the country’s economy is currently experiencing a strong rebound requiring growing imports possibly of raw materials and machinery among others.
The growing imports will in turn result in increased demand for foreign exchange and Imara believes the foreign exchange auction system cannot cope with the demand as already evidenced by delays of between 11 and 14 weeks for settlement proceeds in USD which are now more commonplace.
With the country likely to experience rising inflation, part of which is coming from rising global food and fuel prices, there would be additional pressures on US dollar import requirements.
Demand for foreign currency, according to Imara, is also coming from infrastructure contractors that are being paid in ZWL but require US dollars for plant and equipment.
“These contractors, whether local or foreign, may have no choice but to look elsewhere for foreign exchange and index their ZWL quotes to USD.
“The same could also be said about the forthcoming agricultural season where the RBZ will be printing ZWL to provide to the suppliers of fertilisers and chemicals for the farmers. These same suppliers will then be looking to convert that ZWL so that they can import the products.
“Ironically, therefore, it might be that it is Government’s infrastructure drive together with the financial support that it is giving the farming sector that is adding to the current pressure on the parallel rate,” reads part of Imara’s Zimbabwe Investment Notes for the first three quarters of the year but released this month.
The ever-increasing demand for foreign currency and its limited availability at the auction system has
seen the premium between the official and the parallel market exchange rate growing to almost 100 percent. The scenario is thus affecting exporters, who are having to sell 40 percent of their foreign currency earnings at the official exchange rate yet they are having to source their input requirements from their suppliers who are pricing at the parallel rate or indeed in USD.
Imara reckons the situation will force exporters to
“move to care and maintenance” while at the same time supply of USD going into the auction will fall short.
“We believe that low margin export businesses may well be the canary in the coalmine; such companies will be an early casualty of the widening gap between the parallel exchange rate and the auction rate as lower returns will eat into their margins forcing them to move to care and maintenance.”
It is this situation that Imara believes will force authorities to devalue the local currency as it risks losing relevance.
“It’s hard not to see the auction-rate devaluing at an accelerating rate over the coming months; there is little to prop it up that we can see,” reads part of Imara’s Zimbabwe Investment Notes.
While the asset management company said it
will not be surprising if the RBZ reduces surrender requirements on a sector basis so as to ease the pressure on such businesses, the best solution would be to “float the currency”.
“As we have written before, the best solution would be to float the currency and allow the market, not the RBZ, to determine the exchange rate and for the RBZ to abolish the surrender requirements on export proceeds.”
The asset management firm believes now is the right time for devaluation as authorities can use the close to US$1 billion Special Drawing Rights funds from the IMF as additional foreign exchange reserves to prop up the local currency.
Treasury recently said it has US$400 million in reserves, in addition to US$1,8 billion in Nostro accounts, funds which experts believe can support a freely floated exchange rate.
Imara reckons a freely determined exchange rate at a time of rising commodity prices would encourage higher exports and provide greater amounts of foreign exchange.
To buttress a freely floated exchange rate, Imara suggests Government should revise its tax payment policy and insist that all taxes, and especially for USD earners, are paid in ZWL, thereby forcing businesses to sell their USD for ZWL at the free market-determined exchange rate.
“That should provide underlying support for the ZWL and give the Government ZWL for its domestic spending.”
It’s a call that has been made by many economic agencies and commentators before including CZI which in its Currency Developments Paper/Submission to the central bank said “in any country the demand for money to pay taxation is fundamental in ensuring currency stability.”
“Given that a large part of the instability in the currency is driven by lack of confidence and by lack of demand for local currency, we believe that changing the rules to ensure that a greater number of taxes are paid in local currency would have a strong beneficial effect on currency stability.”
Imara discouraged other solutions such as loans from Afreximbank which “could be a double-edged sword as these loans, as we understand, are collateralised against future exports proceeds”.
“All in all we would expect the auction-rate to devalue over time from current levels since the RBZ has few other options left to hand,” Imara wrote.
Imara’s call for devaluation comes as the Government, the RBZ, and the business community this past Monday made firm pledges and commitments towards stabilising the local currency.
The central bank pledged to refine and streamline the foreign exchange auction system to ensure that it continues to play its price discovery role in the foreign exchange market.
At this week’s auction, the Zimbabwe dollar depreciated by 2,6 percent, the highest in months, to trade at 90.07 to the greenback. Further devaluation is expected next week as some forex bidders went empty-handed at this week’s auction after the cut-off for bids was increased to 88.5 leaving out bids that came in at 85.
Approximately US$4 million worth of bids were not allotted.
On the main-board, of the 488 bids accepted only 357 were allotted. On the SMEs board, of the 1 196 accepted bids, only 759 bids were allotted.