By ETimes

Old Mutual Investment Group (OMIGZIM) says Zimbabwe’s economy is on an upward trajectory but warns that US dollar shortages will continue amid rapid dollarisation.

The country adopted the use of a basket of strong international currencies led by the US dollar in 2009 to end an unprecedented period of hyperinflation that devastated the value of the Zimbabwean dollar. The dollarisation of the economy was largely welcomed as it brought about stability and certainty.

In 2016, the country introduced the bond notes and coins, which were supposed to be equivalent to the US dollar, to make up for the dollar cash shortage. 

But now the southern African nation’s economy is characterised by a runaway parallel market exchange rate and resurgent inflationary pressures.  At the time of writing, the Zimbabwean dollar was trading at $300x to the US dollar on the black market.

The Zimbabwean dollar depreciated by 23.70% from 108.67 to 142.42 in the first quarter of 2022 owing to currency shortages, according to OMIGZIM. On the informal market, in the same period, parallel market rates have depreciated by c.20% but the premium on parallel rates was more than 80%.

“There is a strong correlation between currency depreciation and inflation which ended the quarter with a year-to-date value of 19.82%,” OMIGZIM stated in its latest quarterly report.
It said the growth in the economy is characterised by increasing volumes by manufacturers due to growth in demand.

“Growth is being driven by strong performance in 2021 of major sectors including agriculture and mining and election spending.”

Going forward, OMIGZIM noted that monetary policy will continue to reflect macroeconomic vulnerability as evidenced by the recently increased interest rates.

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Policymakers increased the bank policy rate from 60% to 80% per annum at the beginning of April. The Medium-Term Bank Accommodation facility interest rate was reviewed from 40% to 50% per annum. Also quarterly reserve money growth target was reduced from 7.5% to 5% for the quarter ending June 2022.

“These measures are unlikely to result in satisfactory and sustained stabilisation of prices given foreign currency shortages,” reads the report.

It clearly stated that foreign currency shortages will persist amid increased dollarisation. “The interbank rate is increasingly being alienated in the market given the growing and unsustainable divergence with parallel rates. This points to inevitable dollarisation to stabilise prices.”

This raises the need for corresponding increase in production and productivity, foreign currency receipts and exports returns.

While some sections of the society call for dollarisation, Reserve Bank of Zimbabwe John Mangudya says “if we dollarized the economy will not grow as much as we are doing now”.

OMIGZIM added that its strategy to year-end will zero in on green shoots from selected companies, while overarching positions remain defensive and long term in nature – Harare

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