eBusiness Weekly
Golden Sibanda
The success of Zimbabwe’s decision to replace the multi-currency system with a mono-domestic currency (Zimbabwean dollar) for all local transactions, hinges on the capacity of the country’s exporters to generate sufficient foreign exchange to support efficiency of its fledgling interbank forex market, financial analysts have said.
Zimbabwe outlawed the use of a basket of currencies, effective June 24, 2019, and reintroduced the Zimbabwean dollar as the country’s sole legal tender, as part of counter measures to foil forced redollarisation at a time the economy is reeling from a constricting dollar crunch.
Before the ban, the Zimbabwean economy was hurtling towards self-redollarisation as most corporates were quoting prices of goods and services in United States dollars when the majority earned local currency, forcing Government workers to also demand payment of their salaries in hard currency.
Companies thus, either fomented parallel market activities by directly buying foreign currency on the informal foreign currency market, or indirectly by demanding payment for goods and services in forex and forcing the consumers to source the hard currency on the black market to be able to make payments.
Finance and Economic Development Minister Mthuli Ncube contends banning the US dollar dominated multi-currency regime will reinforce desirability of local currency for transactions, contain inflation and stabilise prices while restoring the full range of monetary instruments to the Reserve Bank of Zimbabwe to be able to defend the value of local currency.
Zimbabwe had used the US dollar, among a cocktail of foreign currencies that included British pound, Botswana pula, South African rand and Chinese yuan since dumping its inflation ravaged domestic currency in 2009 following years of a ravenous western sanctions and a precipitous economic meltdown.
The banning of the multi-currency system has resulted in the foreign exchange rates on the free-rein parallel market tumbling from as high as 15 dollars (Zimbabwean dollar) to one United States dollar and converging or even lagging behind the official interbank market rate, which averaged 8,3 to the US dollar as of Wednesday.
But leading financial analysts, InterHorizon (IH) Securities said amid the debilitating foreign currency shortages, which have driven illegal trade in foreign currencies on the black market and stocked price volatility, the success of Zimbabwe’s currency measures hinges on exporters capacity to generate sufficient foreign exchange.
While fiscal and monetary authorities have instituted a number of initiatives to bolster the interbank foreign exchange market to improve liquidity and dampen activity on the black market, given pass through effect of premiums from illegal trade in forex on prices, analysts said export performance will determine the success of the recent currency changes.
“During the month of June, both the monetary and fiscal authorities made seemingly hastily announcements that led to the banning of the multi-currency and the reintroduction of the Zimbabwean dollar.
“Going forward, the success of these measures is hinged on the foreign currency generating capacity of the country’s exporters.
“The greatest potential risk facing the foreign currency generating capacity of the country is the acute electricity load shedding,” IH Securities said in the equities and research company’s latest report.
The analysts said the current power supply crisis, where peak demand for power of 1 700 megawatts falls short of supply at below 1 000MW, could have negative bearing on the performance of the mining industry, especially gold mining, which generates a significant portion of the country’s foreign currency earnings.
Zimbabwe is facing an acute shortage of power after water for power generation at Kariba was cut by the Zambezi River Authority, which oversees the affairs of the dam, on account of fast receding lake water levels stemming from the drought in the Zambezi River’s catchment area.
Further, earnings from gold mining are seen taking a further knock, following the decline in deliveries in the first quarter of this year, as authorities have not barged demands by small-scale miners to increase the portion of hard currency (50 percent) they retain as hard currency.
Small-scale miners accounted for 60 percent of the 34 tonnes of bullion that the country’s entire gold mining industry produced last year who may side market some of their produce to higher paying foreigners.
Zimbabwe gets the bulk of its foreign exchange from minerals that mainly include gold, platinum group metals (which between them account for just over 60 percent of the country’s earnings), chrome and diamonds.
The country racked in US$3,2 billion from mineral exports in 2018, a figure which represents 76 percent of the country’s official total annual export earnings last year.
Zimbabwe continues to face significant mismatch between the value of its exports and import due to poor export performance, with most productive sectors still performing below capacity, and hence dependence on imported goods.
To support efficiency of the official forex market, the RBZ has indicated that foreign currency retention ratios for exporters remain the same, however, it would increase liquidity on the interbank through the US$330 million worth of letters of credit to fund the importation of basic commodities such as fuel and wheat imports.
To supplement the facility the central bank also indicated its intention to improve foreign currency supply on the interbank by injecting 50 percent of the foreign currency the apex bank retains from exporters’ proceeds.
Furthermore, the Government has scrapped the US$10 000 daily trading limit for bureaux de change and the 2,5 percent maximum trading profit margin for banks, to make the interbank foreign currency market more efficient and bolster Government’s currency reforms.
