It was just a week ago when the Reserve Bank of Zimbabwe announced pre emotive measures to deal with the anticipated economic impact of Covid-19. In spite of recorded having recorded no cases at the beginning of the month, President Emmerson Mnangagwa declared the pandemic a national disaster owing to the known weakness of the healthcare system in the nation. Among the RBZ’s measures, the biggest talking point was the 180-degree turn on the use of foreign currency as legal tender. The lockdown announced late Friday and taking effect Monday 30th March saw an unexpected turn of events in the parallel market for foreign currency as the Zimbabwean dollar firmed considerably.
The economic impact of Covid-19
We have spent some time covering the impact of Covid-19. The global nature of the pandemic means that effects are felt across the board, especially our export markets as the world moves into crisis mode. Imports also grind to halt albeit slowly given our dependence on them. Adding a lockdown to this environment means a drastic decline in domestic commerce. With non-essential services largely shutdown the little economic activity we had is put to a halt. The informal sector and Zimbabwe has a large one, is also forced to cease operation. The harsh reality is that our low-income economy, where many earn hand to mouth is threatened massively.
What do US dollars have to do with Covid-19?
The short answer is “not much”. While other nations with more robust economies turn to quantitative easing, which for the layman is printing money, the government of Zimbabwe has long been accused of such activities. From as far back as 2014 in one form or another.
Why have the rates fallen?
When the RBZ announced the interbank rate freeze and the return to legal tender status of foreign currencies we had no anticipation of a lockdown coming and believed this would put more upward pressure on the Zimbabwean Dollar exchange rate with the US dollar. The announcement of the lockdown put the proverbial cat amongst the pigeons. The serious consideration of a lockdown turned the tables and suddenly, in the next 21 days at least, the US dollar was not the most precious commodity in the nation. Households tasked with figuring out how to provide food and necessities for the next 21 days while many would not be earning meant digging into those saved up US dollars as the rainy day has come. Without the need to buy Zimbabwean dollars to transact a lot of people pulled out of the market. Buyers also were understandably likely instructed by their financiers to simply get rid of Zimbabwean dollars they held and as Zimbabwean dollar liquidity drained rates would firm.
The demand side also moved, US dollars are being used as a store of value in Zimbabwe but the lockdown makes food for example more valuable than money. In an article, we explored payment advantages between various payment methods in Zimbabwe and found that no method holds a significant advantage, even US dollars. For the rational person, in this case, it simply made more sense to buy what they need with Zimbabwean dollars. As the President conceded the pandemic gave us no warning and Zimbabweans only had 2 days to prepare. Businesses which play a big part in the market for foreign currency would have been faced with closure over the next 21 days if deemed non-essential, they too suddenly had no reason to be in the market. Finally, there is a reasonable belief that the lockdown may last longer than 21 days if things do not go to plan, a plan which Zimbabweans are not in on if there is one. All this to say many people exited the market for foreign currency in a short period.
It is imperative that the lockdown period ends as soon as possible and life starts again as the effects of it being prolonged will have devastating effects. Beyond what we have already seen. Please do your best to comply and only move where necessary.