I have been trying to predict what effect the COVID 19 pandemic will have on the value of the local currency. The mental exercise has resulted in failure and even folks I consulted were not very convincing. I will lay out my thoughts here in the hope some smart people will help me with a credible theory. I won’t hold anyone to their opinion, the fact of the matter is no one knows what will happen but hey why don’t we just debate it anyway.
Why is the exchange rate important anyway? Zimbabwe has reduced itself to be an importer of anything and everything. Prices are therefore very sensitive to any movement in the exchange rate. Usually a devaluation results in a higher magnitude inflation as businesses try to hedge against further deterioration.
Individuals often have to import necessities like essential medication all the way to power generation items for themselves. This makes the demand for hard currency abnormally high in the country besides the fact that we have gone through hyperinflation before and we are wiser now and won’t keep our money in local currency.
The value of the local currency is mostly reflected on the streets (the parallel market) therefore I will keep my reasoning to factors that seem to matter on the streets and for individuals who may have hard currency or may need hard currency.
Scenario A
The first scenario is that the currency will deteriorate steeply. Here are the factors that would suggest so:
Momentum
This is not really a factor but just an acknowledgement that the momentum in the loss of value of the Zim dollar has been picking up in the past weeks. On the last day of February, 1 USD was equivalent to ZWL31.00 on the streets and today it is ZWL45.00. So of course without anything of the sort of COVID 19 the currency is turning to rubbish all by itself with the help of the government of course.
Exports impacted
COVID 19 has resulted in and continues to bring about a shrinking global economy. More countires are shutting down by the day. Zimbabwe exports raw material like gold, platinum and the key one: tobacco. Demand for these is already down and will continue going down. This means foreign currency inflows are going to be limited and with scarcity prices go up and the ‘price of the USD’ itself will go up in the country.
Tourism at near zero
With all the world going on lockdown Zimbabwe will not get any tourists visiting. This is another important source of foreign currency. Again this will keep tilting the value of local currency towards worthlessness.
Remittances will all but dry up
Most hard currency in the hand of individuals comes from remittances from loved ones who live outside the country. Now COVID 19 has left these diaspora benefactors in a vulnerable position. They have also lost jobs just as locals (who were lucky to have jobs in the first place) will do. A great number of Zimbabweans in South Africa survive by waiting tables and they support families back home through those means. The restaurant sector is one of the hardest hit by the lockdown in force in that country.
Overall uncertainty will kill ZWL
In uncertain times like these no one wants to be left clutching at our nonsense currency. With whatever little money they have to spare, most people will try to convert it to USD. Those who do have USD will only dispose of what they absolutely have to convert but otherwise they will hold on to it. Very little USD will thus be chased by bucket loads of ZWL. Result: ZWL continues a steep fall.
You can add to this list of demand and supply factors that suggest that the downward spiral is inevitable. What other scenario is possible though?
Scenario B
Is it possible that the local currency will strengthen against other currencies?
Borders closed
Travel outside Zimbabwe has been banned and likewise the destination countries are not receiving visitors too. Individuals can’t cross borders easily anymore meaning they can’t go to import whatever they usually do and the demand for forex may reduce. Even if there was no ban on travel, the situation is scary in itself and discourages travel anyway. Besides, what would one do if they go to South Africa or any other country that’s on lockdown?
If a lockdown is enforced
If the government announces a comprehensive lockdown and thus confine everyone into their homes, the local currency may become a bit firmer. If not much trade happens in the streets then those who definitely need to dispose of hard currency may be forced to accept lower ‘prices.’
Limited importation of cash
Remittance channels like Western Union have to import cash into Zimbabwe to fulfill cash pick ups which are preferred to deposits into FCA’s by remittances recipients. It is quite likely that the COVID 19 crisis will limit the ability of these guys to do this. If the little remittances coming in start being received into FCA’s without cash coming in then folks will be forced to liquidate into local currency upon withdrawal. Unfortunately they will do so at the less favourable official bank rate.
Fear of cash
If COVID 19 cases visibly increase there is the possibility that people will start being afraid to handle cash even USD cash for fear of getting the virus that way. If (a big if) this happens then again the rate will climb down.
Scenario C
Scenario C is obviously that both will happen in succession. My estimation is that the currency will lose value quite steeply (rate will increase in street lingo) and then it will start to firm up. The crisis is going to be longer than most people anticipate and it is over that lengthened period that the scenario B factors will begin to matter.
Please help me in this mental exercise. What can you theorise about the value of the local currency in the wake of COVID 19? Of course we shouldn’t take this too seriously. No one has a crystal ball into these things. Anyone who claims to do is a dangerous person.
One response
Thank you for sharing