After a sustained period of slowed rate depreciation the Zimbabwean dollar has resumed it’s free fall with the parallel market rate now hanging around the 15 mark to the US dollar. This is a significant mark as it is the value of South Africa’s Rand. The importance of this is because South Africa is our largest trading partner who we import much from particularly in retail. Parallel market quotes for the US dollar yesterday surged to 14.8 with some quotes going as high as 15.2, the South African Rand currently trading at 14.76 with the US dollar.

Purchasing Power Parity

If it wasn’t already clear that Zimbabwean pricing is heavy on the embattled consumer reaching parity between the Zimbabwean dollar and the Rand will make it abundantly clear – if it holds long enough to test. The theory of purchasing power parity simply states that using the price of the same item in two different we can derive an exchange rate between the two units used in the different places. With the Rand and Zimbabwean dollar near parity, given that many still rely on the parallel market to access foreign currency, we will be able to glean just how much factors such as transportation and duties add to prices as compared to South Africa.

Interbank follows

The interbank market meanwhile has reached rates of 11 to the US dollar as it too has seen a sharp increase in the last two weeks. The difference between the two markets has grown once again, now around 3.53, the biggest absolute margin we’ve seen between the two since the interbank rate was somewhat freed. Going forward it will make more sense to track the percentage premium the parallel market holds over the interbank market. Using 14.8 for the parallel market and 11.27 for the interbank market that premium currently stands at 31.32%.

The recent salary hikes to civil servants have been put forward as a probable cause for the sharp increase in the rate. Certainly there is a question of greater money supply growth, what the Finance Minister often refers to as liquidity. While the Rand parity mark has long been expected by many it is ultimately the money supply situation that will determine whether this mark is sacred or just a stop along the depreciation march.