Whenever we talk about money and the state of all things monetary in Zimbabwe we approach the discussion with great caution. Inflation and exchange rate are two of the major indicators in this area that we cover regularly. The parallel market exchange rate is a key indicator for Zimbabwe’s economy and its activity in the last 2 weeks has sent alarm bells ringing as people are paying up to 300 Zimbabwean dollars for 1 US dollar. Jarring as this is we have seen the writing on the wall.
In the first quarter of 2022, the parallel market rate has moved from 220 for a US dollar to 300 at worst. This represents a 27% depreciation in the Zimbabwean dollar in the first three months of the year. On the official auction market, the exchange has experienced a similar fate. After closing 2021 at 108.67 Zimbabwean dollars to 1 US dollar, in the final auction of March, the rate slid to 142.42. This means on the official market the Zimbabwean dollar is 23.7% down this year. This is around the same figure as the depreciation for the entire of 2021. The movement in the two holds the parallel market premium (extra Zimbabwean dollars the parallel market offers/demands over the auction market) within the 100-110% band. 102.45% in December and 106.4% at the end of March to be exact.
The writing was on the wall
The chart above shows the behaviour of the parallel market exchange rate from March 2019 to the present day. We can see that each year there is a surge in the parallel market rate, a depreciation in the Zimbabwean dollar that starts around March. There are many reasons behind this with the biggest of them being harvest time and marketing season for tobacco farmers. With tobacco farmers being paid 75% of their proceeds in foreign currency and the remaining 25% in Zimbabwean dollars it is expected that farmers will be in a rush to offload those Zimbabwean dollars for the stable US dollars with the parallel market the only outlet to do so. As does everyone in the economy who wants to preserve the value of their money. We’ve also observed the gradual increases in money supply and increased government borrowing through treasury bills. All bad omens for things to come.
The parallel market, just like the official market responds to conditions and the current movement is rapid but certainly not unexpected. Time and time again when commenting on the brief periods of relative stability we experienced in terms of inflation and exchange rates we mentioned that central bank behaviour is the one thing that can rapidly change things. Now we have a parallel market exchange rate that is running away and sure to pull an already “increasing at an increasing rate” inflation.