It’s politics, stupid!
The parallel market rate extended its gains this week with the dollar fetching ZWL$300 up from about ZWL$260. Analysts are arguing that the surge by the US Dollar was to do more with the loss of confidence in the local currency as calls to redollarise grow louder.
The government says the redollarisation of the economy is a non-starter and is working on a path in which the local currency will be the sole currency in five years.
The central bank says 56% of transactions last year were in local currency and the economy does not have sufficient dollars to run a sole United States dollar economy. This demonstrates that the local currency would be with us for a long time, it says.
However, developments on the ground point to the contrary amid galloping prices of goods and services in response to the rising parallel market rates thereby fuelling inflation which was 72,70% in March from 66,11% in February.
Companies say the parallel market is the preferred route as the auction caters for 30% of their needs. The situation was worsened by the central bank’s failure to release the funds allotted at the auction putting pressure on demand from the greenback.
The central bank has responded by hiking the bank policy rate to 80% per annum from 60% to curb speculative borrowings. It also reviewed the time deposit and savings rates to 12,5% and 25% per annum respectively from 10% and 20% in a bid to promote the use of the domestic currency. This measure is in addition to the directive by the Treasury for some taxes to be paid in local currency. However, the deposit rates trail inflation meaning an individual with local currency would turn to a safer currency like the dollar thereby pushing up rates on the parallel market.
What authorities should be wary of is the widening gap between the official and the parallel market rates. While the dollar is trading at ZWL$145,8721 at the foreign currency auction, the greenback fetches ZWL$300 on the thriving parallel market.
The widening of the rates has raised fears of fuelling rent seeking behaviours with those with access to the foreign currency auction system tempted to cash in at the parallel market. There have been concerns by monetary authorities that some bad apples with access to the auction system were abusing that privilege.
There are concerns of an increase of global inflation as a consequence of the on-going Russia-Ukraine conflict which had secondary pass through effects on domestic and international prices.
Rising prices of oil, gas, fertilisers and other related products had the effect of increasing global inflation and inevitably had a negative impact on domestic costs of production and was destabilising the foreign exchange market, the central bank said this week.
“…the Committee (monetary policy committee) reiterated the need for the bank to remain focused on inflation reduction and putting in place additional policy measures in response to the resurging inflationary pressures and foreign exchange parallel market activities,” central bank governor John Mangudya said in a statement.
However, the monetary policy tools seem to have run out of steam as the parallel market juggernaut rolls on. Zimbabwe’s problems seem bigger than the fiscal and monetary policy interventions.
