500 Million Facility Tames Run-Away Exchange Rate, Prices Remain Distorted

The parallel market exchange rates plummeted Monday morning following Reserve Bank of Zimbabwe (RBZ) announcement on Saturday evening that it will be drawing a US$ 500 million facility today to liquefy the inter-bank foreign exchange market, with high expectations that the move would ease foreign currency demand on the market, 263Chat Business has established.

However, the recent exchange rate spike has left a trail of price distortions on the market.

Last week the exchange rate between the local RTGS $ currency and the USD catapulted to RTGS $ 6.8 from around RTGS $ 5.3 / 1 USD on the parallel market spiking inflation.

As of this morning, the exchange rate had stabilized to RTGS $ 5.1/ 1 USD but there was very minimal trading as market participants took a wait-and-see attitude due to volatility.

Market watchers say the spike in foreign currency demand was largely triggered by worsening fuel and electricity shortages in the country as companies invaded the parallel market to buy the greenback to import their own fuel for production and other needs.

However, the US$ 500 million facility came as a freshener to distressed companies with the Finance and Economic Development Minister Mthuli Ncube tweeting over the weekend that the US$ 500 million would target essential imports and productive sectors.

‘Obviously the announcement itself had a bearing on the market and rates had to fall but that on its own can never be said was the major reason. Due to cash shortages on the market, the exchange rate had to self-correct because the levels it had reached it meant there was going to be little trading hence demand would weaken,”

“Due to the over-reliance on imported products it would make sense that shop owners were quick to up their prices and this significant rise in exchange rate meant they also had to increase prices in order to be able to restock,” economic analyst Pepukai Chivore said.

However a survey done by 263Chat showed that despite a drop in the exchange rates most small grocery shops around the Central Business District of Harare were yet to reduce prices and this, according to analysts can be attributed to oscillating exchange rates.

Small grocery shops were still charging a packet of 2 kg rice at RTGS $ 12, 2 liters of Mazoe at RTGS$ 10 and 340 ml of Castle lite at RTGS $ 7.

But prices in major shops such as TM, OK and Food World remained generally stable, with 2 liters Mazoe priced at RTGS $ 8 and 340 ml Castle lite at RTGS $ 4.5.

However, analysts say it remains vague to assess the impact the US$ 500 million facility has had on the interbank market as of today owing to its secretive nature where the Central Bank has not been issuing information of trading activities.