One of the greatest concerns that the government has had to deal with on the economic front is the parallel market exchange rate. After rafts of measures which have been chopped and changed, more measures, a revised mid-term budget and an update to the monetary policy the parallel market rate has shown some signs of reversing as it was approaching the embarrassing 1000 mark. Parallel market rates have of late cooled down to the low 700s. Why is this happening now? Is it real? Will it last?
The official foreign currency exchange system has long failed in allocating foreign currency effectively by the admission of Reserve bank of Zimbabwe Governor John Mangudya. When a market fails to serve its participants a parallel or (black market) pops up to serve the participants. Parallel markets are not a centralised arrangement like the auction we had but they tend to be fairly efficient markets pricing according to fundamentals and taking little details into account. So when we speak of the parallel market rate we are talking about a rough aggregate of rates available. Or so we are told.
Why was the rate “running”?
Those who know about the parallel market will know that it started in 2022 at around 220 Zimbabwean dollars for a single US dollar and galloped towards the 800s by the end of July. The rate was influenced largely by money supply growth and large Zimbabwean dollar balances being generated by the government to meet obligations. Money supply growth has been responsible for most of the exchange rate depreciation. Other practices such as government procurement as pointed out by Ministry of Finance Deputy George Guvamatanga play a part in the jumps as holders of balances would rather “offload at any rate” than be left holding Zimbabwean dollars.
Why has it come down?
The government has released many measures to deal with the parallel market exchange rate. Not all have been successful, quite a few had to be reversed or tweaked to work. However, we can look at 2 measures in particular that have been effective; contractionary monetary policy and the introduction of the gold coins.
Contractionary monetary policy
We agree that an increased Zimbabwean dollar supply increases the parallel market exchange rate by making the Zimbabwean dollar less valuable than the reverse must be true; reducing the Zimbabwean dollar supply will improve the value of the Zimbabwean dollar. This is neither new nor unique, in the middle of 2020 parallel market exchange rates held firm for roughly 4 months on the back of the contractionary monetary policy. It wasn’t possible to hold it forever because the government needed a source of funds to meet its obligations.
The gold coins were introduced to offer Zimbabweans a store of value that was accessible in Zimbabwean dollars. One of the Zimbabwean dollar’s greatest weaknesses is nobody wants to keep it and we are willing to buy 5 months’ worth of electricity or washing powder than keep Zimbabwean dollars. In economics, the term for this is the velocity of money, and how quickly people move it. The velocity of the Zimbabweans needed to be slowed down and gold coins presented an opportunity for this. Unlike all other ideas before them, the money would be put out of circulation. There’s the possibility that the government is borrowing money without interest here which cannot be discounted.
Will it last?
In our coverage of monetary developments in Zimbabwe, we have done our best to use our knowledge of monetary economics and matters on the ground combined. Always there is one factor that will determine how things will progress moving forward and that is Central Bank behaviour. If the RBZ can stick to zero money supply growth targets and keep the gold coin system attractive then there is a chance to build on stability. They have shown us that they can in the short term but whether they will in the long term is another matter altogether.