© Bloomberg. A man holds a Zimbabwean two dollar bond banknote for an arranged photograph in Harare, Zimbabwe, on Tuesday, July 31, 2018. Zimbabwe’s main opposition party said it was well ahead in the first election of the post-Robert Mugabe era and it’s ready to form the next government, as unofficial results began streaming in. Photographer: Waldo Swiegers/Bloomberg
(Bloomberg) — Zimbabwe’s dollar shortage is getting worse, but the central bank is going to try to do something about it.
The regulator will inject $500 million into the foreign-exchange market on Monday, it tweeted over the weekend, a move Governor John Mangudya said would “go a long way to stabilize the exchange rates and prices of goods and services.” The money is from “international banks,” Finance Minister Mthuli Ncube said in a separate tweet, without naming them.
The central bank is intervening after the southern African nation’s currency plunged on the black market last week, and the price of goods soared at the fastest pace in more than a decade. Local investors have been piling into the stock market to hedge against inflation that climbed above 75% in April.
“Investor confidence has sunk,” said Chiedza Madzima, a senior analyst at Fitch Solutions in Johannesburg. “Since elections last year, there has been a significant erosion of trust that the authorities can maintain political and economic stability and implement key reforms needed to attract investors.”
The foreign-currency shortage is heaping pressure on President Emmerson Mnangagwa, who came to power in 2017 and won an election in July, promising to revive an economy that had all but collapsed under his long-standing predecessor and ally, Robert Mugabe.
Zimbabwe revamped its currency system in February to alleviate a U.S. dollar shortage, prompting long queues for fuel, medicine and other imported goods. Deadly protests had erupted a month earlier after the government more than doubled gasoline prices.
The central bank’s decision to scrap a peg tying the country’s main form of money — an electronic version known as RTGS$ — to the U.S. dollar and let it trade on a formal market seemed to work at first.
But then a lack of transparency over the companies and individuals who can access dollars from the central bank started to raise doubts about the new system. And an absence of inflows from investors, who are concerned the government’s fiscal policy is still too loose, didn’t help the currency.
The RTGS$ black-market rate weakened 30% last week to a record low of 7 per dollar on the streets of Harare, the capital, according to marketwatch.co.zw, a website run by financial analysts. That increased the gap with the official rate, which is 3.45, to the widest since the interbank market was opened.
“At the rate the local unit is depreciating in the parallel market, authorities have limited options other than accelerating the official-rate depreciation,” said Madzima.
The equity market is also under stress. The Zimbabwe Industrial Index of stocks rose all but three days this quarter, adding 18%, the most in the world. That’s bad news: in Zimbabwe’s topsy-turvy markets, rising stocks are a sign that local investors are rushing to protect themselves against inflation. Even though shares are no longer denominated in U.S. dollars, the assumption is that stock prices will rise with inflation.
“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.”
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