Parallel market rates hit 100% ceiling, why and how? - Zimbabwe Situation

Parallel market rates hit 100% ceiling, why and how?

Parallel market rates hit 100% ceiling, why and how?

PARALLEL market rates have finally hit 100% when using EcoCash or bank transfers to buy the greenback, the first time they have reached such a rate since dollarisation and the main question now is how and why we got here.

Source: Parallel market rates hit 100% ceiling, why and how? – NewsDay Zimbabwe July 18, 2018

By TATIRA ZWINOIRA

On Friday last week, a snap survey done by NewsDay at all the major cash dealing points in the central business district found that at 10am the previous day, the parallel market rates increased to 100% from between 70% and 80% earlier that same day.

Tinashe (name changed), one of the cash dealers whom the paper spoke to on Friday, who is in his early 20’s said the reason was due to talk of seizing disbursements of cash to depositors.

“Rates have increased my brother. It started yesterday (Thursday last week) around 10am. What I know is if you want to do a transfer its now 100%. This is because Reserve Bank of Zimbabwe governor John Mangudya said that individuals can no longer get United States dollars from the banks” Tinashe said.

Not only do these new rates represent massive erosion in the trust and confidence of government, but they also signify just how bad the liquidity situation in the country has reached to as one banker put it.

“It is a demand and supply thing at a basic level, where you got a set of economic agents who require foreign currency and another set that have it and through a mutually beneficial market mechanism are able to exchange that value. At the second level, it becomes a policy issue to say are we pursuing the correct policy in terms of the relationship between the real monetary sectors because one is a representation of the other,” a banker who wished to remain anonymous said.

“I do not see it is as a problem, because it is the market responding to the policy framework that is there and markets really have a life of their own. You cannot legislate a price, it does not work, so what markets simply do is that they will find their own mechanism to function, so I do not see it as a problem, but as a response to a policy environment.”

With 25% or more of forex used by manufacturers coming from the parallel market, it is important to examine how this new rate of 100% was an eventuality and not a hypothetical.

Basically, it is due to more business leaders turning to the parallel market to service their forex need to import raw materials, individuals seeking to have more value for their cash and the forthcoming elections.

Back in May this year, when the Confederation of Zimbabwe Industries (CZI) released its composite Business Confidence Index wherein it stood at minus 14,4 for a quarter-on-quarter basis, CZI explained business leaders were losing trust and confidence in government.

Explaining these results, CZI said that most of the lack of trust and confidence was due to growing pessimism in how government was handling the foreign currency situation, as producers were getting below their forex requirements.

By business losing confidence over the forex issue, this forced them to hold onto any cash they get and at the same time increasingly turn to the parallel market for any shortfalls they required.

The result was cash barons instructing their dealers to hike rates due to the increased demand.

Compounding the situation further was the central bank and banking sector.

Over the past few months, the central bank and banking sector have been making statements deliberating on whether to continue disbursing cash to depositors considering the money was not coming back.

These talks have eroded further trust in these institutions from depositors who already did not trust them due to the menial disbursements they were getting.

As such, many depositors withdrawing cash have chosen to keep it rather than circulate it. Instead yhey take the cash to the parallel market to get a higher value in terms of RTGS or EcoCash funds.

This has also contributed to demand, as more people are visiting cash dealers on a daily basis.

As such, due to more companies and individuals sourcing cash from the parallel market demand went for forex rose.

Finally, as it is an election month and there has been a lot of uncertainty in terms of freeness and fairness of the vote, as experts and opposition parties have raised many irregularities in the election processes.

Cash barons have seized on this uncertainty to further hike rates to ensure that after the election they have made huge profits.

Cash barons with access to top banks in the community are fueling the parallel market, followed by diaspora remittances from individuals and retailers involved in cash businesses.

Africa Round Table chief executive officer and economist, Kipson Gundani said it was inevitable that the parallel market rates would hit 100%.

“If government continues the way it is going with its fiscal deficits, all these rates are going to continue to go up, because the parallel market has the forex,” he said.

He, however, added that elections was also a factor, saying “in simple terms, it is and that speculative behaviour is associated with the holding of elections where those with United States dollars hold on to it, which creates a demand and supply problem on the black market”.

Responding to these increases on Friday last week, Mangudya said that the cash barons behind the dealers would soon lose out, since the central bank had increased forex into the market.

“We have released and are going to continue releasing foreign cash into the market in order to stabilise the foreign currency market…I was out myself, as you know and I just arrived yesterday (Thursday last week) and we have received a good boost from our financiers, including as usual the Afreximbank and we are putting that money into the market,” he said.

He said fuel operators, cooking oil producers and wheat producers were allocated their foreign currency requirements.

“…over and above that, we are putting a substantial amount of cash in the market. We started this week and will continue next week, so people should not confuse the monetary side and political side, I think we would prefer that people do not confuse these two. On the monetary side we are clear with what we want to do,” Mangudya said.

“You are also aware that we are giving 100% cash to the diaspora, continue to give 70% of foreign payments to our artisanal gold producers, and monthly we do $100 million and we have now increased starting from next week (this week).”

His advice to “those who are selling foreign currency at ridiculous rates, they are going to regret, because people are just making money out of them, its just arbitrage.”

The central bank will now be injecting $150 million a month into the economy, up from a previous of $100 million.

COMMENTS

WORDPRESS: 6
  • comment-avatar

    Sir Thomas Gresham’s ( 1519-1579) law of currency is being tested in Zimbabwe :–
    Gresham’s law states that any circulating currency consisting of both “good” and “bad” money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the “bad” money. This is because people spending money will hand over the “bad” money rather than the “good” ones, keeping the “good” ones for themselves. Therefore the bad money (bond notes) will drive out the good money(US dollars) and a US dollar will become extinct inside Zimbabwe.
    To summarise – In Zimbabwe a US dollar and a ZW Bond note are equal value according to the Reserve Bank of Zimbabwe and Doctor John ‘Bond’ Mangudya.
    The market place of Zimbabwe and the world are presently being tested to see if GRESHAMS LAW of CURRENCY is still valid after 400 years as more new bond notes arrive on the scene in 2017 and 2018.
    Which would you prefer a USD or a bond note today – Is Gresham correct ? students of economics please give us your thoughts on this famous man

  • comment-avatar

    Old Mutual price in London is USD 2.04 and in Harare 5.00.

    500 divided by 204 = 2.45. This means that at the parallel rate 1 USD is equal to 2.45 mabondi or zollars ( ZW’s surrogate currency).

    Comrades – never bank a USD and never foolishly believe the market place will not prevail. Greshams law even 400 years after it was proved is still alive and operating in ZW in 2018

  • comment-avatar
    Morty Smith 4 weeks ago

    Thank you Mr Ace. ZANU has always thought the natural laws of economics do not apply to them. This in spite of the fact that they have failed spectacularly over and over again they still keep trying to plummet new levels of disaster. Truly they are unable to govern this country for the benefit of its people

    • comment-avatar

      Thank you too Mr Moriarty Smith – ZANUPF have been at the controls for going on 40 years now and although it would appear that they have become better educated with more people with fancy qualifications than ever they seem unable to even grow maize or wheat or even enough milk to satisy ZW needs !
      But still we roll forward where every day seems to be another April fools day with some of the political announcements. Even a ZW space program has been mooted – all we need now are some spacemen and women from The University of Chivhu to lead the way. The land of milk and honey is just around the next corner. Fasten your seat belt Morty for expected take off !

  • comment-avatar
    Tsotsi 4 weeks ago

    Amusing to see folk like ace mukodata reveling in their discovery of ‘something new’ – like Gresham’s law. As if no one in Zimbabwe knew Gresham’s law before ace was born! As if – just because Gresham was a foreign ‘Sir’ – his law is more respectable than the multiple warnings of countless Zimbabwean economists over many years. This is the Zimbabwean curse: the intellectual arrogance of the truly pitifully ignorant. The arrogant rejection and suspicion of anything Zimbabwean because the message is interpreted as being corrupted because it comes from the mouth of an ‘obvious enemy of the people’. Like John Robertson, who has the misfortune of being White. Grow up ace, knowing Gresham’s law and turning it into something that will help Zimbabwe are two different things. The first is dead easy. The second will take the rest of your life. Oh, and stop blaming Mugabe / ZANU PF. The attitude that ‘the world owes me a living’ is deeply ingrained. It has to end.

    • comment-avatar

      You clearly have learned nothing Tsotsi and maybe that is confirmed by your name ! The ZANUPF government in nearly 40 years of iron rule over ZW have also leaned nothing – if you earn a dollar you cannot spend two !
      This is simple economics and when countries refuse to follow this rule trouble will appear as we are seeing now in ZW.
      John Robertson is an economist educated at the University of ZW and he merely reports on what is happening in ZW. Perhaps if government listened to him ZW might find itself on a better footing.
      Corruption in ZW is a fact and not a rumour. Last I heard of Comrade RGM he was at the blue roof or in Singapore counting his nest egg.