LIVINGSTONE MARUFU/RYAN CHIGOCHE
Lack of confidence in the market is one of the major causes of currency volatility, the central bank governor and multiple economists have said.
The exchange rate this week stood at ZWL$600: US$1 on the parallel market.
The Zimbabwe dollar was trading at ZWL$338.49 :US$1 at the auction system.
In April, the Zimbabwe dollar was trading at ZWL$159.34: US$1 at the auction system while on the parallel market the local dollar was trading at ZWL$420:US$1.
The Reserve Bank of Zimbabwe governor John Mangudya told Business Times that confidence issues rank among the top on causes of exchange volatility despite the economic fundamentals being sound enough to support exchange rate and price stability.
“Instead, the confidence deficit is one of the major drivers of exchange rate and currency volatility which the government and the bank are currently addressing to arrest the current situation,” said Mangudya.
“Besides confidence, appetite for US$ for store of value, speculative behaviours and general market indiscipline are also causing the challenges of currency volatility. But with confidence some of these challenges will be addressed.”
He said the country is generating adequate foreign currency with US$9.7bn received in 2021 against foreign payments of US$7bn in 2020 and these are the highest foreign receipts in the country’s history.
The country has so far received foreign currency amounting to US$4.1bn as at 15 May 2022, about 40.5% increase from the same period last year of US$2.8bn.
Mangudya said money supply has been under check with reserve money stable at around ZWL$27bn since October 2021.
“Exchange rate volatility is, therefore, not a result of shortages of foreign currency and money supply growth,” Mangudya said.
Economist Gift Mugano said several factors are driving exchange rate in Zimbabwe and confidence is one of the very key determinants and also excessive money supply.
“Now on confidence we need to understand the major driver of the confidence deficit. We need a paper on this but just on the top of my head they must do a proper study on what problems the people have with policy makers,” Mugano said.
“But on top of my head when people lose their money more than twice in two decades I’m talking about extreme cases where we had a collapse of the ZWL$ in early 2009 and in 2019 people lost all their savings in US$ so they have no confidence in the system. Generally the people don’t trust the system.”
Added Mugano: “From 2018 this government has made a number of policy mistakes where policies were announced and reversed people might have forgotten let’s say the ban of Ecocash within three days reversed, suspension of the stocks market for a number of months again it was reversed just on 7th of May there was suspension of lending these are shocks and some of these shocks are permanent shocks even if the suspension is lifted because it leaves a scar which is permanent that when you are trading in this economy you have to be careful.”
Mugano said as an example people who were getting offshore lines of credit from South Africa some of them have been kicked out of the arrangement because they have no capacity of servicing that credit arrangement in an environment where unilateral decisions are made.
“In Zimbabwe suspensions and temporary policies are made willy-nilly so this has remained as permanent shocks in the system and those are the people we want to talk and say believe in our policy making we have seen that the suspension of the Zimbabwe Stock Exchange millions of dollars were lost after that suspension was done,” Mugano said.
He said investors and shareholders are losing their money and still there were companies like Old Mutual and PPC under suspension at the stock exchange.
“If these multinational companies are ‘bullied’ this way there is no way we can bring confidence into the country,” he said.
Mugano said the government should have a market laid economy in foreign exchange markets which is characterised by absence of distortion.
He said it was not prudent to have “two formal market platforms which are interbank and auction and have two different exchange rates for the same commodity and think people will have trust in what you are doing”.
“We want to have the interbank operating as the real interbank when a person can walk in and buy forex without restrictions. In the meantime to restore confidence we have to go for the US$ because I think we have no instrument to sustain the Zimbabwean dollar then later on we then work on a dedollarisation roadmap together with Zimbabweans that way we are building confidence,” Mugano said.
Economist with University of Zimbabwe, Moses Chundu said confidence deficit simply means citizens have lost trust in their currency and by extension on monetary authorities.
“It simply means there is a lack of trust and once trust is broken it is very difficult but not impossible to restore it but it has to be earned back. The starting point is to understand why trust was broken in the first place, in other words how we ended up with the deficit,” Chundu said.
“An honest answer to this question is a good starting point towards restoring it. It is also important to engage and understand the one who has lost the trust to hear of what actions on the offending party could help restore it. In our case the offending party seems to be trying to dictate how it must be restored.”
Crystal Candy general manager Jimmy Psillos said backing the Zimbabwe dollar with international reserves could restore confidence in the market.
“The authorities should back the local currency with reserves using an explicit formula that guarantees convertibility like what Botswana, Hong Kong and Bulgaria did. Possible advantages of backing the currency include guaranteed stability, government can freely spend their own money and more importantly shortcut to confidence,” Psillos said.
