Just as new measures to prop up the ailing Zimbabwean were announced the parallel market exchange for the Zimbabwean dollar to the US dollar hit a new high of around 1:700. This goes squarely in the opposite direction of the fight the authorities have been putting up. Having started the year at around 1:220 this marks a depreciation of 68.57% in 2022 at the halfway point. In the same timeframe, the official auction exchange rate has moved from 108. to 366.2687, a 70.57% depreciation. However, the gap between the two remains alarming. The battle now comes down to how effective the new set of measures will be in arresting this runaway parallel market exchange rate.
While the official exchange rate has made headway the parallel market remains dominant in pricing. The auction system experienced serious problems towards the end of 2021 with delays in the payment of US dollars successfully allotted at the auction. Buyers wait for as long as 6 weeks to receive the amounts they bid for. That delay coupled with the inclusivity of the parallel market rendered the auction ineffective as it was meant to be a spot market with payment in 3 days. The large size of Zimbabwe’s informal sector, which is largely excluded from the auction meant most businesses continue to price using the parallel market rate. While the RBZ gave some way by allowing businesses to price within 10% of the interbank (willing buyer, willing seller) rate that was introduced in April 2022 this rate remains ineffective as it is too far removed from the majority market. The result is a return to accelerating inflation, doubling between May and June on a year-on-year basis.
While some commerce in the market is still being done in the mid-600s large transactions are attracting an exchange rate of 1 to 700. As we have observed in following this exchange rate sooner or later the bulk of the market follows these rates. So while it is currently a preserve of large transactions we can reasonably expect it to reach 700 even in the face of new measures. You need only look at the impact of the last set of policy announcements just under 2 months ago when the rate of 1:400 was perceived as alarming.
Are gold coins the answer?
In an attempt to listen to the concerns of Zimbabweans and take into account at least one of the reasons Zimbabweans show a preference for the US dollar, its lack of store of value, introduced the idea of gold coins as a store of value for Zimbabweans. While we don’t have details yet on the gold coins or rules around them think-pieces have already been written about whether or not the gold coin will reduce demand for US dollars and encourage people to let go of the US dollars they hold we have a little way to go before we see the legal instrument that will bring them into law. The obvious dangers that are known to us all have been brought up again. There is an understandable fear, based on past experiences that it will require a liberal and transparent system to make the gold coins viable, Two things which government policy is not well known for. The other measures announced alongside the gold coins include increasing interest rates for both borrowing and deposits and a forward market for exchange rates are noble in principle. Still, the interest rates for example come a little too late.
New answers are certainly needed as everything that has been tried so far has not the intended results. Some policies have worsened the situation in their impact. The usual complaints about lack of consultation have come up with the most recent policies. Time will, of course, tell.