Home LOCAL NEWS Non-monetary factors blamed for forex rate volatility

Non-monetary factors blamed for forex rate volatility

Non-monetary factors blamed for forex rate volatility

The Reserve Bank of Zimbabwe (RBZ) has said that the depreciation in the exchange rate observed in the last few weeks is a result of speculative behavior.

While the official exchange rate remains fixed at US$1:ZW$25, the parallel market rate has widened to above US$1:ZW$70. This is happening despite tough fiscal consolidation measures adopted late 2018 under the Transitional Stabilisation Programme (TSP), where Treasury has scored major milestones such as trimming budget deficit and recording surplus revenue.

The currency front has remained a burning challenge on the economy, with illegal forex dealers and speculative parallel market activity being blamed for manipulating the market. The trend has forced continuous price escalation, pushing ordinary people to the corner as buying power keeps dropping amid weakening incomes.

The outbreak of Covid-19 since last December, has worsened the situation through slow down in business activity, which is threatening job security and dampening prospects for economic growth. To ease the burden on ordinary Zimbabweans, the Government has permitted the use of free funds (forex) and is cautiously drip feeding cash into the formal system to avert money supply growth while enhancing consumer convenience. Economists have, however, criticised the fixing of the exchange rate saying the rate must be market driven which the RBZ has agreed to consider. As these measures are being implemented, many are seeking answers as to why the local currency is depreciating at such a fast rate.

“Depreciation in the exchange rate observed over the past few weeks, was largely a result of behavioural and other non-monetary factors such as negative perceptions, adverse expectations, speculative tendencies of economic agents and tracking of the Old Mutual Implied Exchange Rate (OMIR), which was quoted at around ZW$140 per US dollar over that period,” said the RBZ in a statement on Monday.

It said the wild depreciation was divorced from economic fundamentals as it occurred immediately after the opening of the tobacco selling season, which is traditionally associated with stability and appreciation of the localcurrency.

“In addition, the introduction of the ZW$10 and ZW$20 notes did not represent increase in money supply but a substitution effect – from electronic dollars to physical notes,” said the Apex bank. “Price determination in the economy by businesses is being established on the basis of expectations about the depreciation of the exchange rate and prices that will exist in the future.”

The monetary authority said the forward pricing system or practice of front-loading anticipated exchange rates in the current prices based on fear factor, is detrimental to the economy as it leads to self-fulfilling depreciation in the exchange rate, with negative knock-on effects on prices.

Going forward, RBZ said it would continue keeping the growth levels of reserve money within thresholds that are consistent with the Monetary Targeting Framework designed to fight inflation and exchange rate pressures.

It said growth in reserve money over the first quarter of 2020, for instance, was well within the Monetary Targeting Framework set by the Monetary Policy Committee (MPC). The MPC had set a limit of 15 percent on reserve money growth, consistent with a monthly inflation target of five percent.

Reserve money was ZW$13,39 billion as at 4th of June 2020, a decline of ZW$437,66 million, from ZW$13,82 billion recorded in the week ending 29th of May 2020. “The decrease in reserve money over the week was reflected in declines of ZW$435,60 million and ZW$65,78 million in RTGS balances and other deposits, respectively.

“Partially offsetting these declines were increases of ZW$42,25 million and ZW$21,46 million in required reserves and currency in circulation, respectively,” said the monetary authority.

Similarly, the RBZ said drawdowns and on-lending activities under the Mid-Term Bank Accommodation window are within an aggregate MPC approved amount of ZW$2,5 billion between March and May 2020.

This is meant to augment banks’ credit to the productive sectors of the economy to re-boot production so that the economy becomes self-sufficient, particularly in the wake of the Covid-19 pandemic.

Meanwhile, Government deposits at the Central Bank declined to ZW$2,85 billion as at week ending 4th of June 2020, from its peak of ZW$3,37billion in February. “This reflects increased expenditures, which partly increases market liquidity.

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