Impact
We believe the statutory instrument may have the following effects, over the next six months:
- Increased US dollar domestic inflation – Formal businesses, such as pharmacies, may be forced to increase their US dollar prices to align them with the parallel rate pegged ZWL prices.
- Increased demand for cheaper foreign goods – Higher domestic US dollar inflation may force economic agents to demand cheaper foreign goods which will increase smuggling at the country’s porous borders and ultimately negatively impact the country’s trade deficit.
- Lower formal sector US dollar sales – The high domestic US dollar prices will reduce US dollar cash sales for formal companies which unfortunately will force more formal companies to demand foreign currency at the RBZ currency auction.
This may translate to a significant increase in the value of weekly foreign currency bids at the RBZ auction. Lower formal sector US dollar cash sales may also negatively affect government’s foreign currency tax revenues, which may also increase government’s participation on the RBZ auction (either directly or indirectly), further increasing demand for currency on the RBZ auction.
- Shortages or delays in accessing foreign currency on the RBZ auction – The relatively high trade deficit and lower formal sector foreign currency cash sales may likely trigger shortages of foreign currency on the RBZ auction. Protracted delays in accessing foreign currency at the RBZ auction, may likely force more companies to the parallel market in search of US dollars.
- Increased demand for currency on the parallel market – As more formal companies abandon the auction due to foreign currency shortages, the ZWL will likely devalue aggressively on the parallel market, whilst pressure for an official devaluation will rise as the parallel rate premiums increase.
- Increase in ZWL inflation – A significant devaluation on the parallel exchange will immediately trigger an increase in ZWL prices across the broader economy, which unfortunately has the following implications:
- Decline in household real incomes, especially Civil Servants and formal workers;
- Decrease in real value of ZWL assets, such as bank deposits, bonds, money market investments etc.; and
iii. The RBZ will be forced to increase their base rate to curtail inflation, which will negatively impact credit to the private sector.
- Decline in overall economic activity – Ultimately rising inflation lowers economic activity and we fear a permanent loss in confidence in the Zimbabwean dollar if a second extreme round of hyperinflation occurs within two years.
We believe, in our opinion, SI 127 of 2021 increases the likelihood of another round of extreme hyperinflation, which may force economic agents to abandon the local currency indefinitely.
Continued next page
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