ZWL to depreciate moderately this year
BROKERAGE firms and economists have hinted at a moderate devaluation of the local currency, predicting the local unit to officially close the year trading at between $2 000 and $3 200 against the US dollar, with credit going to the Government's prudent policy interventions.
Monetary authorities, however, dispute the analysts' predictions, insisting the projection are still far off the mark as the local currency is likely to close the year trading at around $1 500, indicating a 123 percent depreciation
The Zimbabwe dollar is yet to find its footing since its introduction and has had to deal with many hiccups along the way. In June 2020 the auction market was introduced with the currency trading at $22,50 per US dollar.
The currency took a heavy blow in the six months to December 2020 as it depreciated by 263,50 percent to close the year at $81,7866. In 2021, it opened the year at $82,0914 and throughout the year, the Reserve Bank of Zimbabwe was accused of heavily controlling the currency as it closed at $108,666 to the dollar, representing a 32,37 percent depreciation.
Opening 2022 at $108,666 the dollar depreciated by 517,90 percent to close the year at $671,4466. However, as much as the prediction by IH Securities and others look very gloomy, it shows the local currency to be a bit resistant as it will depreciate by 373,15 percent in 2023 which is a better performance than last year.
In its outlook for 2023, IH Securities, argued that election spending and treasury activities will cause slight disturbances to the currency, resulting in the projected depreciation figures.
Concerned about the recent increase in money supply and using 2022 average depreciation, IH Securities had the highest prediction and said, “August month-on-month growth rates for Broad Money averaged 33,1 percent versus M1 growth rate of -0,4 percent resulting in annual growth rates of 388 percent and 267 percent respectively.”
IH Securities believes the increase in money supply suggests potential resurgence of treasury activities and this will cause a disturbance in the near stable environment that was being felt late last year.
“The interbank rate depreciated at an average weekly rate of 3 percent during the year 2022. Applying the same rate of depreciation in 2023, the interbank rate will close the year at $3 177 from $690 recorded at the beginning of the year. From our view, this will be the best case scenario considering the downside risk of elections,” IH Securities asserted.
But Monetary Policy Committee (MPC) member, Persistence Gwanyanya, said the predictions by these analysts were unrealistic as the central bank is continuing to put measures to arrest the depreciation of the local currency.
“The predictions are a bit far off as the central bank is putting more measures to arrest the depreciation of the local currency. Unfortunately, I cannot disclose anything much but the monetary policy to be released either today (Thursday) or tomorrow (today) will shed more light,” he said.
In the Monetary Policy Statement released later yesterday, the central bank said one of the measures set to stabilise the exchange rate, is the selling of forex to banks “from the surrender portion of foreign exchange receipts in the outlook period, taking advantage of the reduced foreign currency demand on the auction system from averages of about US$45 million per week at its peak to current levels of below US$20 million per week”.
According to Gwanyanya, the issue of rate movement is to do with liquidity management as was felt in December when contractors were paid.
“The issue is that we need to deal with liquidity management and we identified it as a major problem so the monetary policy will show you how we are going to deal with that. If we deal with that at the end of the day the Zimdollar should trade normally,” he added.
Gwanyanya believes the current economic situation plus the additional measures should leave the local currency trading at around $1 000 or $1 500 to the US dollar by the end of the year.
“We have not yet felt any political pressure due to the pending elections so the currency should close at around $1 000 to the dollar, but if we experience a shock either from elections or somewhere else, we should see it at around $1 500 per US dollar,” said Gwanyanya.
Akribos Capital, an investment firm was moderate in their analysis making quarterly projections rather than bold full-year predictions.
“Looking ahead we expect populist policies to take centre stage in this election year and the slowdown in economic growth in leading global economies like China, the US, and the Eurozone to have a ripple effect that will exert more pressure as the ZWL,” Akribos said.
They believe in this highly likely worst-case scenario, the Zimbabwean Government is going to continue to largely fund its ongoing economic projects and elections with the local currency, a situation which will see the devaluation of the local currency.
“Against this background, we expect the exchange rate to close Q1,2,3 between the lower and upper bound of $1 500 — 1 800 against the US dollar while inflation hovers above 250 percent.
According to economist, Enoch Rukarwa, an election year is usually associated with investment halt as economic players apply a wait-and-see approach to efficiently strategise post-elections.
“Contractionary measures implemented by Government from May 2022, anchored potentially pronounced inflationary pressures and exchange rate volatility. If these measures are pursued religiously in 2023 the economy will experience moderated currency depreciation.
“However, an election year triggers excess expenditure patterns which are predominantly consumptive in nature. Such unbudgeted expenditures are usually funded through seigniorage revenue thereby creating a vicious cycle in the inflationary market,” Rukarwa said.
Another economic research firm, Morgan and Co, delved into some of the quantitative and qualitative variables that influence parallel market rates in order to assess the direction of exchange rates.
Morgan and Co in their economic outlook said; “From a demand-supply perspective, we note that the strong growth in ZWL money supply in the second half of 2022 amid a growing distaste for the ZWL holds negative implications.
“In 2022 alone, local ZWL money supply grew by 82,4 percent to $42,5 billion while the bank policy rate of 200 percent and the increased dollarisation of transactions have weakened demand for the local currency.”
According to the research firm, more and more businesses are operating using the greenback and ZWL transactions are now mostly limited to statutory obligations and payment for goods from economic players that accept ZWL at official rates.
“Given that the economy is extensively informalised, we opine that these statutory payments and compliant businesses are too small to drive demand for the ZWL that is sufficient to plug the depreciation of the local currency,” Morgan and Co added.
They also did add those dynamics in the energy sector could fan the depreciation, albeit too mildly and the efforts to close the gap between the official and market rates, however, could result in a slower depreciation of exchange rates on the parallel market in 2023 compared to 2022.
Morgan and Co believe the exchange rate will close the year around $2 500 to the dollar.
Economist, Dr Prosper Chitambara, said the jury is still out and it is still early to call on how the Zim dollar will perform this year as elections pose uncertainty.
“This year because of the elections, there are a lot of uncertainties as things might get worse or better, but usually an election is not good for the economy and even politically. To be honest the jury is still out and we hope the elections will be managed well.
“If the elections are held well, the hope is that it will keep the economy stable and that will contain the exchange rate instability or depreciation. However, election year sees more public spending and this will destabilise markets, but to what extent? It is still too early to make a call,” Chitambara said.