Déjà vu: Further policy changes by mid-year?

Opinion
The poor performance of the ZWL thus far (2024) raises a need for another typical policy revision.

In 2022 and 2023, the Reserve Bank of Zimbabwe (RBZ) implemented monetary policy changes around the same time of the year, but both due to similar developments on the inflation and exchange rate fronts.

These developments seem to be replaying themselves in 2024, and therefore poses questions of similar reactions from the Central Bank.

After failing to contain the parallel exchange rate in 2022, the Central Bank introduced a Willing Buyer Willing Seller market, commonly known as the Interbank market, to challenge viability of the informal currency market.

The parallel market has always been seen by market players as a more realistic basis for valuation as the parallel exchange rate is driven by market dynamics as opposed to an allegedly manipulated formal currency market. Supply and demand factors have proved to have a toll on the parallel market.

With every marginal change in the supply of the local currency, ZWL, the parallel exchange rate responds with a proportional movement. However, the formal exchange rate operates within confinements. Resultantly, the highly informal economy of Zimbabwe tends to resort to the parallel currency market for respective currency needs.

In 2022, the exchange premium between the parallel and the formal rate had widened to over 50%. The introduction of a rather freer formal exchange market managed to trim this premium to almost 20% by end of the third quarter.

The year following, an injection of more ZWL liquidity in the economy saw the parallel exchange rate spiraling while the formal rate remained constrained by regulated confinements. Consequently, exchange premium scaled to a circa 110% by the second quarter of 2023. In response, the government implemented further tightened the contractionary monetary policy along with introducing a new currency auction system to trim the rampant premium. By the third quarter of the year, the exchange premium had shrunk to a circa 30%.

In 2024, the ZWL has already depreciated by a circa -30% against the US$ on the Willing Buyer Willing Seller market. Subsequently, exchange premium has widened to a circa 50% and shows a likelihood of further expansion.

This is all induced by increased money supply in the economy which has increased supply of ZWL against an already low demand level for the local unit. The Central Bank has maintained a contractionary monetary policy for over two years. However, regular money injections to fulfill obligations in local currency have seen regular revisions of the policy.

The poor performance of the ZWL thus far (2024) raises a need for another typical policy revision.

Meanwhile, the ‘alleged manipulated’ formal exchange rate has inched up the magnitude of depreciation from an average of -0.1% per day in the fourth quarter of 2024 to an average depreciation of -3% in 2024.

On one hand, this expansion could have been triggered by higher bids from the market in-line with parallel market activities. On the other hand, this could be an engineered trajectory meant to close the premium gap and subsequently stabilize the exchange rate as was seen in the fourth quarter of 2024.

Nevertheless, the parallel exchange rate is also widening its magnitude as demand for the greenback firms up ahead of the projected economic woes in 2024 along with uncertainties around the full impact of new policy measures from the Ministry of Finance on the fiscal front.

This cat and mouse between the formal and the informal exchange rate will, once again, fail to end ‘naturally’, triggering further monetary policy changes before the lapse of the second quarter of the year. These policy changes tend to have an effect on valuation of ZWL denominated assets, particularly financial markets. It also poses a bearing on listed companies that still report in ZWL, leading to misstatement of financial results post implementation.

  • Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma_

 

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