Zimbabwe dollar to devalue further in 2021

Zimbabwe dollar to devalue further in 2021

The introduction of foreign exchange system on 23rdJune 2020 by Reserve Bank of Zimbabwe to stabilize the exchange rate has been described as a short-term measurement as the year on year inflation   continue to rise.

The Foreign Exchange Auction System Rate has been regarded as the official exchange rate between the Zimbabwean dollar and the US Dollar.

In the past months, the local currency has been trading at between ZW$81 and ZW$83 against the US dollar on the auction market, which has brought some stability in the market

Currently, the black-market rate has been hovering at ZWL$ 105 to 130 per one US Dollar due to an increase on year on year inflation and loss of consumer confidence in local currency.

The prevailing dual forex market – the parallel market enjoys in excess of 40 % premium above the official exchange rate as reviewed by Zimbabwe Coalition on Debt and Development.

“The Reserve Bank of Zimbabwe (RBZ) introduced the new Foreign Exchange Auction System on the 23rd of June 2020, which has been integral in supplying the much-needed foreign currency to the key sectors of the economy.

“Although the auction market is celebrated for having managed to suppress the galloping inflation in 2020, the interference of the RBZ in the auction system has blocked the free-play of market forces leading to the overvaluation of the local currency.

“The questionable functionality and efficiency of the auction market, same as its unsustainability has promoted a dual forex market, with the parallel market enjoying in excess of 40% premium above the auction market.

“The auction system has failed to attract the requisite liquidity to meet the economy-wide demand for forex, electing to partially meet forex bids of corporates in the priority list.’’ ZIMCCOD

The auction market contributes much to address inflation in the past seven months and ensuring fairer access to foreign currency.

Economist Gift Dhuwayo calls for a free play of the market forces to determine the currency rates as the Zimbabwe dollar continue to lose its value.

“As the inflation continues to wise to have a free float exchange rate, allowing the exchange rate to be determined by market forces in long run it will return stability in the economy” he said

The scarcity of forex in the economy requires the accumulation of forex reserves through sound export policy complemented by a supportive and sound banking policy that safeguard export proceeds deposited by exporters, which is lacking in Zimbabwe as the government has raided forex accounts held by the private   sector as well as imposing forex retention policy meant to siphon private forex earnings to the government.

Zimbabwe must come up with sound monetary and fiscal policy designed to support export companies without attaching conditions that scuttle the investment potential of the private sector in the economy.

Extracted from https://sashares.co.za/news/zimbabwe-dollar-to-devalue-further-in-2021/