Dollar overvalued but . . .


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The Zimbabwe dollar should have been trading at $18 300 to the United States dollar by the end of April if the auction rate had been following inflation trends, according to a leading exporter from Bulawayo who has been keeping track of the exchange rate since the introduction of the auction system last year.

The dollar, however, traded at $9 204.42 on Monday, slightly above the $9 000 diaspora rate announced by central bank governor Gideon Gono when he unveiled his monetary policy review on May 19.

The greenback is trading at around $23 000 on the parallel market.

Sources said rates on the parallel market had been static since Gono’s monetary policy review. The subsequent clean-up campaign saw most of the foreign exchange dealers, popularly known as osipatheleni, disappear from Bulawayo’s so-called “World Bank” square, though some pop up now and again.

Gono, who has been under pressure from exporters to devalue the local currency, has said devaluation is not the only answer to the country’s economic problems.

He said in his monetary policy review statement that as long as there was widespread indiscipline and corruption in the country, with market players only interested in a making quick buck, any unguided exchange rate depreciation would have short-term gains.

He also said devaluation could have serious repercussions on the economy as Zimbabwe was highly import-dependent.

“Whereas it takes a matter of a day for a devaluation to increase input costs, such as fuel prices, imported electricity costs, chemicals, debt service costs, among other essential outlays, it would take a full season for farmers and months for miners and manufacturers to significantly respond to the price incentive,” Gono said.

He, however, devalued the local currency by 45 percent, with the diaspora rate declining from $6 200 to $9 000 against the greenback. Market watchers, however, said this was not enough.

“While the devaluation is welcome,” Standard Bank of South Africa said in its review of African currencies, “it is certainly insufficient and is thus unlikely to significantly address the dire situation that exporters face.”

“The inflation rate is currently around 130 percent, implying that further devaluations are necessary in the foreseeable future. Also, the new rate is still well below the parallel rate, which is currently estimated at $19 000. The divergence of the two rates contributes to significant destabilising macroeconomic pressures,” the bank said.

It said gold producers, for example, had been calling for an exchange rate of around $12 000 to the greenback so that the gold price could rise to $210 000 per gramme. The central bank raised the price from $130 000 to $175 000 per gramme.

But it appears that the central bank is allowing the currency to find its range on the auction floor as it has already surpassed the diaspora rate announced by Gono. The diaspora rate has operated more like the ceiling in the past.

Oscar Chiwira, a lecturer at the National University of Science and Technology, said Zimbabwe was in a catch-22 situation.

“If it devalues, prices of most goods will go up because the cost of imported raw materials will have increased. If it doesn’t, people with foreign currency will channel it through the parallel market where they can realise maximum gains,” Chiwira said.

Foreign exchange inflows into the country in the first four months of this year amounted to US$385.7 million, down from US$448.6 million during the same period last year.

Some observers believe that some Zimbabweans abroad are now sending their money to relatives through neighbouring countries where they cash it in foreign currency, which they then change on the parallel market at home.

The rand was fetching $3 000, the pula $4 500 and the United States dollar $23 000 on the parallel market this week.

Chiwira said while exporters were clamouring for devaluation of the local currency, this would only be a short-term benefit as long as the country did not improve productive capacity and promote a strong import-substitution policy.

“Because of the de-industrialisation that has taken place so far, the country does not have the production capacity to sustain a weak currency because, while exports will earn more in local currency, they will not be earning more in hard currency unless the country exports more,” he said.

A country has to export more than it imports to have a positive balance of payments.

The central bank doled out nearly $3 trillion to boost production in industry, but some of the money was reportedly diverted and invested in speculative activities. Firms that were allocated the money are expected to repay the loans by the end of this month.

Chiwira said there was need for an audit to check how the money provided by the central bank had been used, with names of companies that had abused the facility being published.

 

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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.

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