MNCs should review the financial resilience of their local partners
Firms should remain alert to frequent policy changes by the government and central bank, including periodic crackdowns on the parallel market, as they may cause spikes in FX volatility and scarcity. MNCs should assess the financial resilience of their local partners, considering support for those facing short-term liquidity and credit challenges, or channel transitions away from those with a high risk of insolvency, and toward those with proven access to FX. MNCs with a local entity should consider self-financing FX from the parent company or other subsidiaries in third countries to help overcome poor FX access in the market. Where pricing in ZWL (or multiple currencies), firms should consider increasing the frequency of their pricing cycles. Lastly, companies selling to the public sector should assess their operations’ regulatory compliance to FX rules to avoid costly punishments.
Overview
The Zimbabwean dollar (ZWL) stabilized at the black-market rate in September, after five months of severe volatility. Since the end of March 2022, it depreciated 75.2% against the dollar through July 2022, before paring losses to 68.1% in August. Since March, its official rate has also depreciated by more than 75%. The currency’s freefall prompted frequent policy interventions in recent months, as authorities sought to contain it and the resulting re-emergence of hyperinflation. This includes:
- Cracking down on black-market FX sellers
- Re-adopting the USD as a parallel legal tender for five years
- Issuing gold coins as an alternative legal tender
- Introducing a new interbank FX rate
- Temporarily banning all bank lending
- Doubling capital gains tax on shares held no more than 270 days
- Suspending payments to government contractors (accused of overcharging by using forward-pricing and the wrong exchange rate)
- Hiking the monetary policy rate to a record high of 200%
Our View
FX access in Zimbabwe will remain poor for the foreseeable future, meaning firms will still source most of their FX needs from the black market. Despite limited supply, the newly issued Mosi-Oa-Tunya gold coins have helped improve the ZWL’s black-market performance since August, and plans to issue smaller, more affordable denominations will add modest support. Yet, the black-market premium on USD is still high—at over 30%—and is likely to remain so, barring an unlikely free floating of the currency. The ZWL will continue to weaken across the main FX markets (the official central bank auction rate, the new interbank rate, and the black-market rate), albeit considerably more moderately than during Q2. At the official rate it will average 369 per USD in 2022 and 713 per USD in 2023. It will be undermined by low confidence in the currency, weak investment inflows, the eventual resumption of payments to government contractors, and a general election due in July 2023. Moreover, the expanded multiple-exchange-rate and new multiple-currency systems will be a source of confusion for MNCs and local partners, creating pricing and planning challenges. In addition, the record-high policy rate will hamper local-currency borrowing, advancing dollarization in the country and prolonging repayment in the local currency.
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