Is the Zimbabwe Dollar To Rand
For all practical intents and purposes, a Zimbabwe dollar is one of the most hard working monies in the world. However, the recent events in Zimbabwe, which has left the country’s economic future in doubt, have put a major dampener on the status of this internationally accepted medium of exchange. On August 12th, the country announced that it was no longer planning to use the US dollar as its currency. This followed a similar move by Zambia a few days before. These developments brought a swift halt to the regular flow of Zim dollars into neighboring countries.
Now that the United States and other key players have withdrawn their backing from the Zimbabwe dollar, the single most reliable way of exchanging the Zimbabwean pound for the global financial community has been abruptly eliminated. Without a single transactional point of contact, the future of the zimbabwe economy hangs in the balance. What makes matters worse is that with the impending cessation of the domestic trade, there will be a serious increase in supply of hard cash to finance the ongoing reconstruction efforts in the country. At the current exchange rate of Zimms, at least seventy tons of the single most used foreign currency is required to fund the reconstruction effort.
This sudden change, or rather, lack of reaction to the developments, raises certain important questions. Why has the single most used international currency, the zimbabwe dollar, suddenly lost so much confidence? What led to the sudden plunge in the exchange rate? And what, if any, are the implications of the current crisis for world trade and the overall stability of world markets? While these are very valid questions, it may be more useful to look beyond the surface and dig a little deeper to get a better understanding of the reasons why this vital trade partner has gone from grace to poor health.
One of the most important reasons for the recent problems in the zimbabwe economy has been the introduction of the 500-dollar peg for the Zimbabwe dollar. Proponents of economic liberalization in Zimbabwe claim that the move was meant as a protection measure against sudden changes in the price of oil, which is used in virtually all aspects of the country’s economy. However, critics argue that the 500-dollar peg was used as a vehicle by which Mugabe’s ruling party used to destabilize the legitimate government and bring about a wave of popular discontent that resulted in the recent political turbulence.
When the Zimbabwe dollar began to lose value, the zomba (the term used for a currency speculator) quickly moved to dump the convertible currency in an attempt to regain some lost investment. This was accompanied by an equally massive rush of purchases of other foreign currencies in an effort to hold the peg so that trade and inflation did not increase. The combination of the two actions led to a major depreciation of the zimbabwean dollar on the world market. The combined effect of these two phenomena pushed the exchange rate to its lowest level ever, below that which it can currently be traded back into the US dollar at.
The traders who had bought dollars with the expectation of increasing them soon realized that they would have to invest more money to get back what they had just given up. With the constant fall in the value of the dollar, the traders had to wait a while before they could start trading their dollars again. Many of them eventually caved in and allowed the peg to fall further, allowing the Zimbabwean dollar to resume its rapid devaluation. As a result, the traders incurred heavy losses and many of them have already given up on this particular currency.
The traders who had never cared for the country’s economic condition prior to the crisis now seem to have lost interest. Even if they were not technically investors, these traders were certainly among the biggest losers in this situation. They had bought hard dollars at the time of the pegging decision so they expected to see the Zimbabwe dollar increase in value in response to the market dynamics. Once the peg was removed, however, the traders found themselves stranded when the value of the Zimbabwe dollar started sliding downhill.
Although the Zimbabwe government is taking measures to stabilize the economy, the traders who lost a lot of money in the market do not appear to be interested in doing so. They have already lost a lot of money, why should they risk again in a situation where they may lose even more? The traders who have given up on the forex market and are waiting for the economy to stabilize may be right, but it is best for them to keep their eyes on the exit doors and not look inside for ways out.