Long road ahead for ZW$
Zimbabwe’s dollar has stood its ground since its resurrection in 2019 despite overwhelming odds that continue to batter the local currency. The first year of the ZW$’s return was marked by a 85% depreciation, followed by a 79% depreciation in 2020 and further depreciation of 25% in 2021 on the official front. We note measures such as the Dutch auction system and support from Afreximbank which have significantly slowed down the depreciation, but there remains more that needs to be done to cement the ZW$’s place among other currencies in Zimbabwe and abroad.
Among the many challenges that the local currency faces is the bipolar exchange rates in the country. Currently, the local currency officially trades at ZWL$118,87 to the USD, implying a gap of almost 100% when compared to parallel market rates of about ZW$$230 to the dollar, despite measures to close the gap. However, the latest monetary policy statement by the RBZ governor Dr John Mangudya comes with new measures that could change the odds of the local currency, and we contextualise this through the lens of (i) local confidence and elevated global risks (ii) trade flows (iii) current account sustainability and (iii) historical success of de-dollarisation.
In the monetary policy statement, the central bank committed to the following measures in support of the local currency:
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Fine-tuning the foreign currency auction system through timeous settlement of bids, comprehensive KYC measures, and building up foreign currency reserves,
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Promoting the use of the local currency by allowing part-payment of royalties by exporters as well as taxes and duties in ZW$,
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Introducing ZW$ fuel stations, Instituting savings and time deposit rates of 10% and 25%, respectively.
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Increasing foreign currency retention thresholds for import-intensive sectors.
We opine that the measures to improve access of US$ on the auction system with the support of the IMF’s SDR allocation could reduce dependence on the parallel market and, if implemented successfully and consistently, could even foster confidence in the official rate in the long run. The promotion of the local currency through part-payments of statutory obligations is two-pronged in its approach to supporting the local currency. Firstly, this could complement demand of foreign currency on the interbank as exporters look for ZW$ to pay some of their statutory obligations in the local currency. In addition, some businesses that are liable to obligations in foreign currency will have the option to use some of their ZW$ balances to fulfil their obligations without going through the parallel market.
We also expect a slight decline in parallel market activity after the introduction of ZW$ fuel given that there is no allocation for individuals’ fuel purchases on the auction system. Further, fuel is at the base of almost every product’s manufacturing process, and availing fuel in ZW$ at the official rates could calm pass-through inflation pressures. Instituting minimum deposit rates on savings and term deposits is a very welcome move that will incentivise “formalisation” of funds from mattress banks. However, the effectiveness of this move hinges on providing a rate of return that is unmatched among similar investments. For example, investing ZW$ balances in the stock market at the beginning of this year has already yielded 19% in less than two months, and this hardly compares with an annual interest rate of 20%. Further, these rates remain well below the Finance ministry’s inflation rate target of 25%- 35% by the end of December 2022.
These measures fit in well with other drivers of foreign currency movements. The monetary policy statement also opens measures to control excess liquidity in the market, which will limit the supply of ZW$. Coupled with the anticipated increase in demand for ZW$, this could oppose downside pressures on the currency throughout the year. Complementary effects are also likely to emanate from the current account surplus which draws from the strong global commodity prices. Zimbabwe’s current account balance is largely driven by receipts from the mining sector and heightened global prices of gold, platinum group metals (PGMs), and other hard commodities on the back of elevated global risks will likely support the surplus in 2022. A current account surplus typically implies more demand for the local currency compared to foreign currency. As a result, these two drivers could slow depreciation of the local currency on the formal market and, at best, keep official currency depreciation below 40% in 2022.
There are, however, limitations to the policy measures that could offset the envisaged outcome. The statement is worryingly vague on the informal sector and the high external debt burden of about US$10 billion. To add on, the election season is gaining momentum and politics is likely to take centre-stage at the expense of economic stability, as has been the case in past elections. We also note that the ZW$ is not yet globally accepted by many international institutions and international investors with funds in Zimbabwe have been disinvesting as quickly as they can through the auction system, all signalling the poor confidence in the currency that remains largely unresolved.
Sentiment in the market irrevocably points to continued currency depreciation in 2022 with differing opinions on the magnitude of the loss in real value to holders of ZW$. Investors with ZW$ seeking returns that are sweeter than deposit rates, albeit at higher risk, can seek exposure on the Zimbabwe Stock Exchange. The bourse gained 1 046% in 2020 vis-aviz a loss in value in the currency rates on the interbank market of 79%, and 312% in 2021 when the official and parallel markets lost 25% and about 44% in value, respectively. Novice investors can invest in ETFs as well as solid stocks in line with recommendations from their investment advisor.
Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com or +263 774 795 854.