Exchange rate harmonisation impossible in current set-up

EARLIER this week, the Reserve Bank of Zimbabwe (RBZ) announced that it had engaged grain millers with a view to finding a compromise regarding the price of bread. It said that it reached an agreement and has assured millers that all their forex requirements for flour imports will be met through the auction.

Prior to this, the retail price of bread had been hiked to near ZW$1 000 per loaf, reflecting a near 100% price increase. e surge in bread prices follows a market-wide price surge across all consumer goods and services in line with rate. the weakening exchange

Accommodation of a single sector is likely to result in other sectors taking similar stances of raising prices by disproportionately higher margins, positioning to bargain with the RBZ.

As a consequence, the market will experience swathes of arbitrage opportunities in select sectors. ere is also fear of subsidisation as RBZ attempts to stabilise prices.

In the current week, the Zimbabwean dollar fell by 3,85% against the greenback, its slowest weekly depreciation since April.

e Zimdollar has depreciated by a cumulative 65% on the auction market since the beginning of the year. Half of the year-todate (YTD) losses were recorded in a single trading session in May (33%), which followed a move to further liberalise the currency market.

e YTD depreciation deduces to a weekly average decline of -4,7%. In 2021, the Zimdollar depreciated by 24% for the full year; its most conservative outturn since de-dollarisation. In 2019 and 2020 the auction rate tumbled by an average of about -75% each year.

e parallel market has remained buoyant and is currently trading at a 79% premium to the auction which is in line with its YTD premium average of 80%. e lowest premium level YTD was at 40% attained earlier in May. YTD parallel market depreciation at -69% is at par with the auction depreciation. Which means we are largely left with the same problems as in the past.

According to the RBZ, weekly auction market data, the total funds traded on the auction market since the beginning of the year equals US$688 million. is deduces to an average of US$30,8 million per week. When looked at against prior year averages, the prevailing rate of weekly liquidity is about 23% lower than the 2021 full-year weekly average.

In 2021, the auction traded an average of US$40 million a week, almost twice the 2019 levels. ese low levels of trading are however in line with demand as measured by the RBZ’s bids received and bids allocated differentials. e total demand and total traded has remained nearly at par since the beginning of the year. is statistic suggests that the decline in trading volumes on the auction market is not necessarily a dip in supply but demand driven.

However, if demand was to come off while supply remained constant, it would have resulted in a strengthening currency. We have however experienced the opposite of that, with the currency declining at the fastest pace since June 2020.

Elsewhere funds disbursed via the auction market up to the end of May represent 31% of total foreign payments made in Zimbabwe; the total foreign payments completed via channels came to a total of US$3 billion by May. Foreign currency accounts accounted for 77% of the total while the Interbank accounted for 2%. e interbank has been posited as price discovery market and has done so over the last few weeks.

However, based on the above statistics, the volumes traded on the respective market remains very low and diminishes its role of price discovery. Using the interbank market to inform the auction rate is not instructive given that the interbank is moving very small volumes implying it's not a very liquid market.

Synchronisations of exchange rate that is between the auction and the parallel market will only be achieved once there is equivalent access to funds to all parties requiring forex. at the country remains highly informal is an indictment and deterrent to the objective of equilibrating the exchange rate. Most informal traders use the parallel market as a default for sourcing forex and can pay any price given that they can also factor the same when pricing.

e objective of exchange rate harmonisation is therefore not achievable given the current economic set-up. What RBZ may do is to relax requirements for participation to onboard a wider section of the market and further liberalise the exchange rate, maintaining tighter exchange controls measures.

More fundamentally the government has to restore monetary discipline by reducing its resort to debt instruments such as TBs to gain liquidity. is will keep money supply in check and cushion the rate spiral.