The Zimbabwe dollar this week weakened against the United States as authorities struggle to defend the value of the domestic currency. The local currency, which was trading at ZW$11.11: US$1 lost 30 percent of its value.
With gold deliveries declining due to side-marketing triggered by unfavourable prices, the depreciation of the domestic currency is seen continuing in the short to medium term. Gold is the single largest foreign currency earner after overtaking tobacco last year. As the tobacco marketing season ends and mop up sales are completed, Zimbabwe will transit to a cyclical period of low foreign currency reserves, weakening domestic currency and rising inflation.
After announcing that the price of fuel will be FOB costs and foreign exchange movements, the price of fuel marginally declined and pushed demand. Resultantly long queues which had almost disappeared last week have re-emerged. This is expected to continue in the coming weeks as schools re-open. With increased demand for fuel, demand for foreign currency is also expected to surge. The growing number of bureau de changes in Zimbabwe also speaks on how government wants to widen avenues for buying foreign currency on the market. Mobile phone companies like Econet and NetOne have also joined the fray.
In our view, as Zimbabwe enters a lean period of foreign currency scarcity, government should avoid the temptations of announcing any policy measure that will prejudice foreign currency earners. Going forward, remittances from Zimbabweans living in the diaspora will be a vital source of foreign currency. Ongoing xenophobic attacks in South Africa will however affect these remittances as many locals living in South Africa are on the knife edge. We don’t anticipate any financial package for Zimbabwe during the last quarter of the year.
Apart from fuel, treasury will seek more foreign currency to settle arrears owed to regional power utilities such as Eskom of South Africa. Eskom has given Zimbabwe strict conditions for power imports to ensure that she doesn’t default. Should negotiations with HCB of Mozambique succeed, Zimbabwe will need more foreign currency for new imports. With nearly a third of the population in need of food assistance, grain imports will compete with other critical requirements for the scarce foreign currency reserves.
In this all, one can argue that Zimbabwe’s concentration of exports exposes the economy to both domestic and exogenous factors. Diversification of exports, value addition is what government should be seriously working on to ensure that the economy manoeuvres turbulent cycles. These cycles are inflationary and may cause civil unrest as the cost of living soars.