Pressure is piling on Zimbabwe’s central bank to depreciate the official exchange rate amid analyst projections that rising inflation could drag the price of the local dollar on the unofficial parallel market in coming weeks to more than 420 000 against the American dollar.
The Southern African country’s annualised rate of inflation raced to 1 193,5% in May from April’s 1 042,9% as a six-year-old economic and political crisis worsened.
Economic experts have warned that the upward inflation spiral will leave Reserve Bank of Zimbabwe Governor Gideon Gono with no choice but to allow the local unit to slide in the coming weeks.
“Such action will diffuse speculative pressure on the Zimbabwe dollar by bridging the differential between the exchange rate and inflation,” said an economist with a Harare-based commercial bank, who declined to be named for professional reasons.
A Harare economist, James Jowa, noted that the monetary authorities are caught between a rock and a hard place in that it is not guaranteed that any devaluation now will trigger the required supply response on the foreign-exchange market.
“It is a tricky situation and they [the authorities] know that as long as they don’t address issues to do with the supply constraints, the economy will not move,” said Jowa.
Efforts to address foreign-currency problems are hampered by the fact that the government has since the beginning of the economic crisis in 2000 made it difficult for individuals and others to buy hard cash on the official market.
All the hard currency coming in through the official channels is reserved for so-called strategic sectors.
“This, coupled with the sub-economic exchange rate on the official market, has effectively meant that no one is prepared to part with their hard cash at the low exchange rate unless they are sure they will be able to buy it at something closer to the official rate,” said the bank economist.
Gono, who has predicted that inflation would decline to about 400% by year-end before slowing down to less than 50% by mid-2007, has since January resisted pressure to devalue the local currency.
The Zimbabwe dollar has been officially pegged at 101 000 to the United States greenback for about two months, having marginally slid from 99 201 against the US unit.
The embattled currency is, however, trading at between 320 000 and 330 000 to the American dollar on the illegal but thriving foreign-currency parallel market, which is more reflective of market sentiment.
The analysts noted that based on monthly inflation figures, the unofficial exchange rate could climb to between 410 000 and 420 000 against the US dollar by mid-July.
“This, however, assumes that monthly inflation remains at 28% during the coming month, which is highly unlikely at the rate we are going,” said the bank economist.
According to the Central Statistical Office, prices of goods rose by 28% between April and May compared with 21,1% between March and April. More pressure on prices during the coming month is expected to come from recent increases in transport costs and electricity tariffs.
The state-run Zimbabwe Electricity Supply Authority announced a 95% tariff hike effective this month, while urban transport operators increased commuter fares by more than 30% in the past two weeks.
The cost of bread also went up during the past fortnight, exerting more pressure on the June inflation figure. The rate of inflation is seen breaching the 1 300% mark in June. — ZimOnline