According to Respect Ronald Gwenzi, a financial analyst and MD of Equity Axis, achieving economic stability in Zimbabwe remains a distant goal despite various measures implemented by the government. Gwenzi noted that it has been 13 sessions since the Reserve Bank of Zimbabwe (RBZ) and the Ministry of Finance and Investment Promotion intervened to stabilise the formal currency market in June. However, when considering the entire year, there have been 40 formal sessions. A total of US$646 million has been traded on the formal market, averaging around US$16.15 million per session. We present an excerpt from his article first published by the Independent:
"Following the interventions by government highlighted above, sessions conducted per week sometimes increased to two from the primary one session a week, for a period of eight weeks before reversion to one session a week.
The implication of this is to give a collated higher weekly average value traded of US$18,1 million on a year-to-date scale. The aggregate value of funds utilised from the formal market against the total foreign outflows will show a significant decline from the prior year.
The divergence is due to increased utilisation of own funds in settlement of external obligations of purchase of imports. The formal market, however, remains very important as a price discovery mechanism and its failure/success in this regard has far reaching impact to the disposition of the broader economy."
According to industry estimates, the actual demand on the market exceeds the published positions by the Reserve Bank of Zimbabwe (RBZ). The estimated weekly formal market demand is now around US$50 million, more than double the US$20 million offered by the RBZ. It is believed that the displayed amount is merely for psychological purposes to show the government’s financial strength. Settlement timelines have also been delayed indefinitely, indicating that the RBZ is struggling to meet the demand and fulfil its promises. Furthermore, one of the major market participants noted a significant reduction in their weekly allocations since June, indicating that their demand is no longer fully met through the formal market. Gwenzi added:
"All these developments are reflected not through the rate performance on the formal market but the parallel market. The parallel market has a direct relationship with the formal market and normally exposes the weaknesses of the formal market, which weakness the authorities controlling the formal market would be working hard to conceal.
The parallel, because of its independence, exposes these underlying challenges. Unmet demand from the auction and interbank, typically gravitates towards the parallel market and the result is worsening rates and wider variance between the two markets’ rates."
The Zimbabwe dollar experienced a 4.5% decline on the formal market, continuing the significant losses observed in the previous week. The cumulative losses over the past two weeks are three times worse compared to the losses in the preceding seven weeks. Additionally, the parallel market has shown instability, with the exchange rate surpassing the US$1:ZW$7,000 mark, resulting in a higher premium. These currency market trends reveal that the formal market is not as free from government influence as previously believed. The government’s obsession with controlling the exchange rate for its own interests negatively impacts the economy. Rising local liquidity supply contributes to the increasing demand, and the temporary suspension of settling dues before elections aimed to stabilize the exchange rate. Gwenzi added:
"The challenge which Zimbabwe faces is that of little fiscus breathing space. There is basically not as much funds to satiate all of the expenses government would wish to absorb.
The undertaking of infrastructure projects using short term debt and basic money printing is an old-fashioned way of speeding up inflationary pressure in the short term.
In the absence of long term cheap external funding, government is cornered as to how it can stimulate economic growth and deliver the developmental agenda.
The inward looking “vene” policies, crowds out investment and reduces competitiveness.
History has shown that short term funding, such as Treasury Bills, cannot be effectively relied on to stimulate growth and aid the budget, especially when the currency is not stable and is in less favour with the populace.
On the horizon, we are, therefore, gazing in a worse off storm, which does not appear to have an aversion solution as yet. The prevailing volatility is a new normal, which we have to brace for over the next five years.
In such an environment, diversification tends to cushion businesses and portfolios."
According to Gwenzi, businesses that generate hard currency and have shorter product cycles tend to perform well. It is crucial for businesses to pay attention to their balance sheet structure to avoid issues like stockouts, working capital difficulties, high-interest rates, loss of value, and overall insolvency. Managing these factors becomes essential for business success and financial stability.
Gwenzi can be contacted at: [email protected]