Ashly DhaniNelson Gahadza
Despite initial hopes, Zimbabwe Gold (ZiG) has seen a steady decline on the parallel market as the gap between the official and parallel market rates continues to widen.
Currently the gap is estimated at 63 percent, and this has seen some businesses effecting USD price increases in order to cover the difference.
At its introduction in April 2024, the ZiG was hoped would address exchange rate disparities and inflation and in terms of ZiG inflation, it has managed to hold while USD inflation seem on an upward trend as businesses are increasing the USD prices.
According to Equity Axis, in its first month of issuance, the ZiG closed stronger but fell to ZiG21 per dollar by the end of April on the parallel market, representing a 36 percent premium.
“The government responded by cracking down on street money changers and imposing heavy penalties on unauthorised money changers, leading to a decline in the parallel market rate to 17 per dollar in May before rising again to 21,5 in June.
“As a result, the exchange premium widened from 55 percent at the beginning of July to 74 percent by the end of the month,” the equities and research firm said.
Investment analyst, Enock Rukarwa, said the foreign exchange market premium, if left unabated, creates arbitrage opportunities in the economy that are distortionary to business operations.
The assertion was supported by economist, Victor Bhoroma, who said the impact of the increase in the ZiG premium is that businesses have seen an increase in the cost of doing business both in US dollars and in ZiG, giving businesses a dilemma in terms of pricing.
“Businesses are trying to compete against cheap imports that are being smuggled into the country at the same time, trying to stay afloat while also ensuring that exports are competitive in the region, hence it has been a dilemma,” he said.
Bhoroma added that sales have also been impacted, and some have also seen viability concerns because of that particular increase in the premium.
“It becomes a nightmare in terms of forecasting and future planning for businesses as that particular premium makes it difficult to plan on debt receivables, payments and stocking levels as it also affects supply and demand in the economy,” he said.
Bhoroma noted that it will be difficult to reverse the premium because there is no confidence in the market.
However, he noted that the premium can be reversed if the central bank is sincere enough in terms of ending parallel Government expenditure and also in terms of having a market-driven foreign exchange market, but at the moment there are no reforms that speak to these issues.
Businesses say they have been struggling to secure adequate working capital, relying on expensive short-term borrowings.
In other instances, the lead time to convert reasonable amounts of working capital through formal channels is dragging into weeks, compromising the production value chain.
The central bank earlier in the month had to intervene with a US$50 million injection into the interbank foreign exchange market, which will largely meet most of the demand; however, increased ZiG sales will compound the situation and lead to forex shortages.
The Reserve Bank of Zimbabwe (RBZ) recently said it had witnessed a build-up in pipeline demand for foreign currency at banks, thus putting undue pressure on the foreign exchange market.
Through the 2024 monetary policy statement presented in April, the Apex bank made a significant shift in its foreign exchange policy, discontinuing the Foreign Exchange Auction System and adopting a market-determined exchange rate system under the WBWS trading arrangement.
Dr Prosper Chitambara, an economist, said the premium is a major cause of concern in terms of its impact on inflation.
“This is inflationary and creates inflationary pressures. The biggest problem we are facing is that there is a huge mismatch between demand and supply in terms of foreign exchange.
“There are many willing buyers of foreign exchange from the business side, but very few willing sellers.
“This means most people are not able to get their foreign exchange requirements and most businesses are failing to have their foreign exchange requirements met in the interbank market.
‘‘Therefore, this then causes these businesses to maybe seek recourse to the black market,” he said.
Dr Chitambara said the widening premium also speaks to the issue of reserves. Because the RBZ had adequate reserves, it could have used part of the reserves to liquidate the interbank market.
Sugar manufacturer, Hippo Valley ,said in its recent financials it was witnessing a cash flow mismatch between the two major trading currencies (ZiG and USD), which is resulting in limited USD-denominated receipts.
In a trading update for the quarter to June 30, 2024, the company said this has resulted in a deficit for critical imports and other local supplies, which are currently priced in USD.
“Currency dynamics have had a negative effect on the cost of doing business as the company is currently experiencing a mismatch between the ZiG and USD on revenues and expenditure where the currency mix on revenues is currently showing a decrease in USD denominated sales and an increase in ZiG denominated sales while providers of goods and services are currently preferring settlement more in USD than what the company is able to generate from the normal sales,” reads the update.
Meanwhile, the Government has hinted at the possibility of reintroducing the Zimbabwe dollar as the main currency before 2030, as previously planned.
However, according to Equity Axis, the de-dollarisation process would require increased actual gold reserves, US dollars, and an audit of gold to verify the actual reserves.
Historically, all attempts to bring back the local currency have failed, resulting in record hyperinflation.
Bongani Ndlovu