The month of May saw further destabilization of the local currency despite liquidity management tools that had been deployed in the prior month such as the gold backed digital coins. The official rate on the auction fell by 85% to the dollar whilst interbank rate weakened by 87% during the month of April as monetary authorities rapidly devalued the local currency to close a widening gap with the parallel rate. At peak, the parallel market premium within the month was 135%, then closing the month at 91% on commencement of a refined Dutch auction system.
Interest rates in the interim have remained unchanged pending guidance from the Monetary Policy Committee. The MOFED is however hinting at a sharp increase in short term interest rates of tenors up to 6 months to stamp out speculative borrowing and reduce the velocity of the local currency whilst being mindful of not threatening the funding ecosystem for the productive sector. The government has also said that it will promote the growing and committed use of the local currency for domestic transactions by ensuring levies and fees charged by its affiliated offices are payable in ZWL. The government continues to strengthen its tight monetary policy stance. With Treasury now handling external loans, money supply is expected to remain under a leash as the 25% USD retentions will be settled using tax revenue. The reduction of USD IMTT will hopefully encourage some return of USD deposits into the banking sector, potentially resulting in some uptick in liquidity. To prevent a complete slide into dollarisation, it was critical that government shows conviction in the ZWL by creating the demand for it. By allowing all customs duty to be payable in ZWL, we expect demand for the local currency to increase. Theoretically this should trigger private sector participation on the supply side of hard currency as companies sell to meet obligations. On the other hand, we might experience increased power supply disruptions as foreign currency inflows to ZESA are reduced. Whilst it is commendable that authorities are enacting measures to neutralise excess liquidity on the market, the key issue remains expanding money supply.
