Zimdollar to weaken after lockdown

Source: Zimdollar to weaken after lockdown – The Zimbabwe Independent

Taurai Mangudhla

DESPITE enjoying some illusory stability owing to depressed demand for foreign currency due to Covid-19 lockdowns, which reduced business activity, the Zimbabwe dollar remains volatile with high risks of holding on to the weakening currency.
Experts say the local dollar enjoyed some stability as a result of restrictions on business that slowed demand for foreign currency.
The informal sector, where most activity is in terms of volumes, was the hardest hit by the lockdown that only allowed formally registered essential service providers.

In terms of value, formal business and strategic imports account for the bulk of foreign currency expenditure.
The recent lockdown — from early January — was even worse, demanding tax clearance certificates and corporate registration documents for a company to qualify for exemption letters.

Experts also warned investors and individuals against holding on to huge Zimbabwe dollar balances amid predictions of an inevitable weakening of the local currency once the economy opens up.

For close to a year now, ports of entry have not been fully operational with traffic limited to commercial cargo across borders while passenger vehicles, buses and aircraft have been restricted most of the time with stringent testing requirements when allowed, effectively deterring travel.
The closing of borders for passenger vehicles and buses has dealt a huge blow on the crossborder traders who, when combined, require millions of foreign currency weekly.

As a result, the demand for foreign currency on the parallel market where informal traders get the US dollar to import has been rather low with expectations it will shoot up once restrictions are eased.

At the end of March last year when the lockdown started, the interbank rate stood at ZW$25 against the dollar while parallel market rates hovered around ZW$40.
In June, when the auction system was introduced, the official rate stood at just over ZW$57 before deteriorating quickly to just over ZW$80 where it held steady for months. Currently, the official exchange rate remains under ZW$83:US$1 while the parallel market is above ZW$100:US$1.

Economist Rutendo Masawi said demand for forex was low because of the lockdown and, once lifted, it would soar although largely driven by large corporates who have traditionally accounted for the bulk of imports.

“Businesses activity is low because of this lockdown, so the demand for forex is a bit low. As we know, Zimbabwe is dominated by informal traders so when the borders open we expect activity to grow although not immediately,” Masawi said.

“In the short run, the informal sector won’t take time to start trading again, hence the demand for forex will increase. An investor with a lot of Zimbabwean dollars should quickly convert the currency into forex simply because our currency is weak and it’s better to save into a stable currency.”
Economist Persistence Gwanyanya said the local currency has benefited largely from low demand during the lockdown.

This situation, he said, was likely to persist for the remainder of the year due to an anticipated stability on food inflation as a result of the bumper harvest expected this agricultural season.

“Zambia has banned grain exports and other products which mean Zimbabwe will be stuck with South Africa where the prices are generally higher given that their pricing system is futuristic and tends to be higher than Zambia,” Gwanyanya said.

This, he added, would directly drive food inflation and negatively affect exchange rate.

“However, with indications of a good harvest this season, there is less demand for grain imports and this eases pressure on foreign currency demand and the exchange rate as well,” he said.

Traditionally, he said, Zimbabwe’s difficult period in terms of foreign currency is the first and last quarter of each year where mining, the greatest source of foreign currency, suffers disturbances on operations from rains, coupled with month-long annual holiday shutdowns at the end of each December.

The tobacco marketing season, where a significant chunk of the country’s export receipts are, also ends around August.

Economist Chenayimoyo Mutambasere argued that demand for forex from the domestic market was significantly determined by access to income.

“The existing lockdown conditions mean that income potential has been adversely impacted, therefore, demand is likely to trickle in. My expectation is that we will not see a huge change in demand for foreign currency in the short term. The formal sector is also likely to take a more conservative approach in light of a global pandemic,” Mutambasere said.

Mutambasere advised anyone with huge Zimbabwean dollars bank balances to buy stocks or convert it to assets.

She said business models could change for good after the lockdown.

“In the end, we might see people buying in bulk locally and selling locally. The formal sector just wants to offload stocks; they will partner with vendors albeit informally, of course.”

She also said the real exchange rate, taking into account purchasing power parity and wage inflation, and prices, was higher than what is obtaining.