There was already reasonable expectation that the introduction of the new 10 and 20 Zimbabwean dollar notes would bring inflationary pressure. Parallel market participants got more of a shock than anyone had expected, at least this soon as the parallel market exchange rate shot to 60 Zimbabwean dollars for a single US dollar. That’s a jump of just under 10 dollars from Fridays close of 50.5, a 15 per cent decline in purchasing power. The Old Mutual Implied Rate shot to 102.4. Registering a sharper 33% decline.
The writing was on the wall
With the impending introduction of 10 and 20 Zimbabwean dollar notes, there was an expectation of exchange rate movement. Jokes even did the rounds about the way we achieved then world-record inflation figures through the introduction of higher denomination notes at each turn going into the Trillions. While there has never been much confidence in the new Zimbabwean dollar from its inception it has been proven that the situation can be made much worse. With the 20 dollar notes still to be introduced there is more yet to come.
Making it worse
Finance Minister Mthuli Ncube revealed that some, if not all, of the government’s 18 billion dollar stimulus package, which looks more like a supplementary budget will be raised through quantitative easing. A practice which is not uncommon the world over. The only problem for Zimbabwe is that the government stands accused of using quantitative easing to fund its operations for years now and the money supply growth trend supports these allegations. The latest of which was levied by former finance minister Tendai Biti.
Crisis in a crisis
It was almost a year ago that the (new) Zimbabwean dollar was being touted by its proponents as the strongest currency in SADC. Those utterances have not aged well as the currency has gone on to surrender 94% of its value to the greenback in the 15 months since Eddie Cross and others made those statements. In all honesty, the statement was never true as they relied on bank rate that was neither real nor effective at the time. Currently, the bank rate is pegged at 25. The currency was only second to Venezuela in terms of purchasing power loss so far this year.
Though it has gotten off to a slow start with decentralisation a marked feature due to the COVID-19 induced lockdowns the tobacco marketing season has a reasonable impact on the exchange rate. While the government granted tobacco farmers 50% foreign currency retention indefinitely the remaining 50% poses a problem that would impact the exchange rate. As the rates have already shown it would be unwise to keep any money in Zimbabwean dollars. Another potential problem would be the source of the Zimbabwean dollars that the farmers are receiving for their 50%.
While the introduction of the new notes, further quantitative easing and tobacco marketing season do have a real impact what we are seeing here is preparation for the effects of those two processes. Nobody wants to be caught holding Zimbabwean dollars when the impact is fully felt.