Parallel markets for foreign currency have resumed the upward trend after taking a dip in December with holidays. The parallel market cash rate also suggests that there is more cash available in the system as the gap between the cash and electronic exchange rates reduced from highs of 55% in the middle of 2019 to just under 30% according to rates obtained from marketwatch.co.zw. In fact, the cash exchange rate grew twice as fast (16%) as the electronic exchange rate (8%) in the month of January. The recent exchange rate climb was subdued by threats made by the Reserve Bank of Zimbabwe which they later followed up with action by freezing the accounts of a little entity China Nanchang.

The interbank rate has largely remained flat for the month of January moving only slightly to 17.26 versus the US dollar up from 16.77 at the beginning of the year. Rates threatened to go on an upward trajectory as sources quoted figures as high as 26 to the US dollar towards the previous week, however, the Reserve Bank of Zimbabwe’s utterances and action curtailed the steep rise and dampened spirits.

In the parallel market cash rate however, we can see signs that the Reserve Banks actions did not affect trade as much and allowed the cash rate to close on the electronic money rate. This can serve as evidence that indeed something is being done about the cash situation and it was not just talk about cash injections into the economy. That said it would appear the cash is still very much concentrated in the hands of the currency traders.

Also of interest is the comparison between inflation rates and the percentage change in exchange rates on a month on basis. As the graph above clearly depicts the two are inseparable. You would expect a lag in inflation because prices seem to be responding to exchange rate movements as US dollar pegging covers the economy. The September jump in the exchange rate of 52% was followed by a 38.75% jump in prices in October.

There was a question as to whether the increase in the supply of cash would lead to a reduction in the electronic money rate to meet the cash rate or vice versa and the events of this month have provided a clear answer. The market rate is the transfer rate and the cash rate is only reflective of the problems associated with transacting in cash; the lack of it. The interbank rate remains far out of touch with the reality.