Currency Rout Ends Suddenly as Zimbabwe Touts $500 Million Plan

HARARE (Capital Markets in Africa) – There’s no evidence that Zimbabwe has pushed through with a plan to alleviate a crippling dollar shortage, and yet the currency has already strengthened on the black market.

The RTGS$ advanced about 17% from a record low, according to marketwatch.co.zw, a website run by financial analysts, after the central bank said it would inject $500 million into the foreign-exchange market from Monday.

The central bank is intervening as the price of goods soars at the fastest pace in more than a decade. Local investors have been piling into the stock market to hedge against inflation, which climbed above 75% in April.

Governor John Mangudya said the injection would “go a long way to stabilize the exchange rates and prices of goods and services,” and Finance Minister Mthuli Ncube said the money is from “international banks,” without naming them.

“Investor confidence has sunk,” said Chiedza Madzima, a senior analyst at Fitch Solutions in Johannesburg. “Since elections last year, there has been a significant erosion of trust that the authorities can maintain political and economic stability and implement key reforms needed to attract investors.”

While the black-market rate strengthened to 6 per dollar, it’s still more than 40% weaker than the official figure.

Currency Reform
The foreign-currency crisis is choking businesses and heaping pressure on President Emmerson Mnangagwa, who came to power in 2017 and won an election in July, promising to revive an economy that had all but collapsed under his long-standing predecessor and ally, Robert Mugabe.

Zimbabwe revamped its currency system in February to alleviate a shortage of U.S. dollars that was causing long queues for fuel, medicine and other imported goods. Deadly protests had erupted a month earlier after the government more than doubled gasoline prices.

The central bank’s decision to scrap a peg tying RTGS$ to the U.S. dollar at parity and let it trade on a formal market seemed to work at first.

But a lack of liquidity and transparency over which companies and individuals can access hard currency from the central bank started to raise doubts about the new system. An absence of inflows from investors, who are concerned the government’s fiscal policy is still too loose, didn’t help.

The equity market is also under stress. The Zimbabwe Industrial Index has risen for 19 straight days and is up about 20% this quarter, the most globally. That’s bad news. In Zimbabwe’s topsy-turvy markets, rising equities are a sign that local investors are rushing to protect themselves against inflation. The assumption is that stock prices will rise in tandem with those of goods and services across the economy.

“Pressures are mounting for wage increases to cope with” inflation, said John Robertson, an independent economist based in Harare. “Desperation seems to be growing.”

Reflecting how skewed the market is, the Harare shares of Old Mutual Ltd., Africa’s largest insurer, trade at about 2.3 times the price of those in London and Johannesburg, when converted to the same currency. The difference has grown from 1.6 times in mid-April.

“Zimbabwe’s solution lies in the faster adoption of key reforms,” said Fitch Solutions’ Madzima. “These include fiscal consolidation, strengthening core institutions such as the central bank and liberalizing key sectors like mining, electricity and fuel. These may take years as they require simultaneous engagement with multilateral lenders.”

Source: Bloomberg Business News