Parallel market rates rise again

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AFTER three months of stability, the parallel market rate rose to levels above the 800 mark last week, sparking speculation about liquidity levels in the economy and the impact on price and currency stability.

Between August and the last weekly auction session, the Zimbabwean dollar remained stable at around US$1 for ZW$750, marking its most stable performance in two and a half years. Two key dynamics accompanied the performance of parallel rates. First, the allotment rate accelerated to close the gap with the parallel rate before stabilizing at levels about 20% lower than the latter. This is a move from ZW478 per dollar to ZW628 per dollar, a cumulative depreciation of 24% over nine weeks. The resulting bounty was the most conservative (favorable) per session on record since 2020.

Another important dynamic was the concurrent decline in average weekly trades, with losses in the auction market continuing as parallel rates were flat. Was this a normal trend? Generally, depreciation in the auction market should have been associated with higher transaction volumes (turnover).

However, with a 25% cumulative depreciation over nine weeks, the overall average transactions per week fell to US$10 million per week from US$30 million in the first six months of the year. This is a whopping 67% drop between periods.

These notable market behaviors signaled a fundamental shift in the market. First, the unresponsiveness of the parallel rate, which had always moved in parallel with the bid rate albeit at parallel levels, was uncharacteristic. The possible reason for this change was due to market liberalization in two ways.

The entrenched use of the US dollar in the economy meant that more players had the ability to fund their own currency needs through direct sales.

A survey of the banking sector showed that around 66% of total loans granted in the first six months of the year were in foreign currencies. Incremental business sales show an increase in the contribution of currencies to total sales, which is now seen at average levels of over 50%.

While this has a depreciation factor connotation, it also shows an increase in currency generation by local businesses that previously relied on auctions for forex. This explains the drop in demand for currencies via the currency auction market.

In addition, the government admitted that it fueled parallel market activities through payments to its contractors on various infrastructure projects it undertook, which would spontaneously fuel the money supply in local currency. Entrepreneurs were the main drivers of the exchange rate in the parallel market.

In terms of the payout crunch, activity in the parallel market has slowed, partly explaining why the parallel market has held at a point where the auction market has seen a sharp drop in trading.

Also, following a declaration in May that the interbank market was allowed to trade higher values ​​and officially become the market maker, the rate was eased as the government’s hand subsided. . Overall, there has been a slowdown in money supply growth and an increased use of foreign currencies in transactions. Other government measures have also buttressed efforts to suppress the rate.

We maintain the view that the overall measures adopted to stabilize the currency are not focused on fundamentals, which are issues that could impact domestic production and skew the current account in favor of Zimbabwe.

For example, gold coins are used to mop up liquidity, which effectively means deferring liquidity pressure to a later date. Through the multiplier, this can gradually slow overall long-term liquidity growth if other factors are constant.

What Zimbabwe needs are policy interventions fundamentally focused on productivity and a more effective cost management system that eliminates a misaligned tax office. Thanks to the efficiency and control of the budgetary management system, the government provides a more favorable fiscal framework, which favors private enterprise by attracting capital in turn.

Zimbabwe currently lacks the internal capacity to self-resource financial resources that can effectively reposition its economy on a path of sustained growth coupled with economic stability.

The mantra “Nyika inovakwa nevene vayo” aims to promote local investment in the economy, an inward-looking policy. The challenge with this mantra is that fiscal resources are already stretched. Zimbabwe’s debt position is nearly on par with its GDP, meaning debt service capacity is already inhibited. Most of the debt is already in default, limiting access to new capital.

Stretching an already stretched budget through government-led projects risks misaligning the IRS as resources are cobbled together between competing needs, resulting in gains that may have a higher opportunity cost. .

For example, the government used the devaluation of the local currency between 2019 and 2021, as a means of redirecting resources from recurrent expenditure (civil service salaries) towards capital expenditure. In the process, levels of public service delivery have plunged, leading to increased rent seeking, corruption in the civil service, general poor service delivery and a fall in overall spending.

A consequence of these measures is that the economy has deteriorated in terms of economic growth and the ills of inflation and currency depreciation have resurfaced. The sensitivity of economic policy calls for authorities to be more careful in managing the spillover effects of policy measures related to economic growth and inflation, which often work in opposite directions.

In trying to solve its economic problems using local resources, Zimbabwe pushes itself to the limit where it usually has to go too far by borrowing excessively from local financial institutions and, in some cases, creating new funds. It is easier for the economy to respond to monetary shocks when the overall liquidity position is fragile, hence the volatility of the exchange rate.

Gwenzi is a financial analyst and managing director of Equity Axis, a financial media company offering business intelligence, economic research and equity services. — respect@equityaxis.net

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