- Have you ever chewed a bubblegum and noticed how the flavor quickly fades away, leaving you chewing something tasteless in no time? Well, that's exactly how the value of the Zimbabwe dollar depreciates when compared to major currencies. Just like the fleeting taste of bubblegum, the value of the Zimbabwe dollar diminishes rapidly, leaving it nearly worthless in the face of stronger currencies
Harare- The beleaguered Zimbabwe dollar, has widened year to date deterioration rate by 87% from 86% last year against the United States dollar. In recent trading on Tuesday’s RBZ governed auction market, the Zimbabwe dollar depreciated from ZWL5755.7081 to ZWL5774.2758, exacerbating the currency's downward trend. On a weekly basis, the currency incurred a modest decline of 0.3%, continuing its persistent sub-1% deficit since the 2023 elections.
On a year-on-year basis, the Zimbabwe dollar has experienced a significant plunge of 89% against the US dollar, as it fell from ZWL732.0036 in November 2022 to its current value of ZWL5774.2758. Comparing the same period between November 2022 and November 2021, the currency had already witnessed a substantial decline of 86%. This year, the depreciation has further escalated, indicating an upward movement to 87% on an annual basis.
The depreciation of the Zimbabwe dollar by 87% implies a significant decline in the value of ZWL-denominated assets throughout the year. As an illustration, let's consider a hypothetical scenario where a ZSE-listed company held an asset valued at 1 million Zimbabwe dollars in January. Given the currency's depreciation, the current value of that asset would now amount to approximately ZWL130,000, reflecting the substantial erosion of value over the course of the year.
In light of the prevailing financial lexicon, the situation is significantly detrimental to an asset that incurred an initial outlay of ZWL1 million in the year 2020, as well as in 2019. It is noteworthy that the aforementioned asset, which had a purchase price of ZWL1 million in 2020, has undergone a depreciation of approximately 99% as of November 2023, thereby resulting in a meager valuation of ZWL10,000. Presently, the value of the asset, when converted to the United States dollar, stands at a paltry sum of US$1.90, a figure that falls below the threshold of 2 dollars when utilizing the official market exchange rate. Moreover, if one considers the parallel market exchange rate, the asset's value is estimated to be nearly US$1.20.
As of the current date, an asset with an initial acquisition cost of ZWL1 million in the year 2020 has experienced a substantial depreciation, resulting in its present valuation of US$167.
During the period spanning from 2020 up until the present date, the Zimbabwean dollar has undergone a significant depreciation of approximately 99.99% against the US dollar, as measured by the official market rate. In contrast, the US dollar has experienced appreciation of over 100% relative to the Zimbabwean dollar, again based on the official market rate.
The aforementioned scenario serves as a clear illustration of the volatile nature of the Zimbabwean dollar, which has experienced substantial fluctuations and depreciation over time. This depreciation has resulted in the erosion of the fundamental attributes of the Zimbabwean dollar as a reliable store of value and a medium of exchange. The currency's diminished stability and loss of purchasing power have undermined its ability to effectively fulfill its role as a stable unit of exchange and a reliable means for preserving wealth over time.
The considerable depreciation and volatility has created an environment where investing in the currency has become increasingly challenging, hence objective economic agents have voiced their concerns and advocated for a transition away from the Zimbabwean dollar in favor of a more stable currency, with the US dollar often being proposed as a preferable alternative. The call for adopting a more reliable currency reflects the need for a stable and trusted medium of exchange that can provide a conducive environment for investment, economic growth, and financial stability.
Despite the government's official denial of complete dollarization, it is evident that the economy has undergone a process of self-dollarization. Presently, approximately 80% of transactions conducted within the economy are conducted using the US dollar.
This phenomenon highlights the practical response of businesses and individuals to the prevailing economic conditions, where the stability and widespread acceptance of the US dollar have rendered it the de facto currency for most economic activities.
Nevertheless, the presence of the Zimbabwean dollar in the value chain continues to pose challenges, particularly for formal retail stores that are obligated to price their products based on the official market rate. This requirement creates difficulties for these stores as they grapple with the significant disparities between the official rate and the prevailing market rates.
The situation becomes more challenging for formal retail stores due to their reliance on customers who are predominantly civil servants. These civil servants often receive a significant portion of their salaries in Zimbabwean dollars. The volatility of the Zimbabwean dollar presents a significant obstacle as it directly impacts the net salary received by civil servants in US dollars.
Consequently, many civil servants find that their total salary, when converted to US dollars, does not exceed US$300 before deducting any expenses. This limited purchasing power further constrains their ability to engage in substantial spending, ultimately affecting the revenue and profitability of formal retail stores that heavily rely on this customer segment.
As a result of the higher US dollar prices at formal retail stores like OK Zimbabwe or Edgars, civil servants may find it increasingly difficult to shop at these establishments. To cope with their limited purchasing power, many individuals are compelled to seek alternative options, such as purchasing goods from street vendors or informal markets. These vendors often offer products at more affordable prices, as they do not adhere to the formal market rate and may operate in a parallel economy.
While these alternative sources may provide some relief in terms of affordability, they also come with potential risks such as product quality, lack of consumer protection, and limited variety of goods. Nonetheless, the economic circumstances and the necessity to stretch limited resources often drive individuals to explore such options in order to make ends meet.
As a result, this insatiable competition ultimately forces formal businesses to shut down.
In an economy like Zimbabwe, the emphasis on pricing over quality has led to the current struggles faced by Truworths and Edgars, while TM Pick n Pay and OK Zimbabwe are experiencing sales below their break-even point. Metro and Peech have already been driven out of business.
Nevertheless, this situation creates a detrimental impact on the overall economy, as the entities that are struggling due to the currency crisis are the ones that annually contribute billions to the national fiscus through taxes. In contrast, tuckshops often evade taxes, leading to a dead end for economic growth.
Hence, despite the modest deficits observed in the Zim dollar over the past five months, we firmly argue that the government should consider temporarily removing the Zim dollar and focus on establishing the fundamental factors necessary for currency stability.
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