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June currency review

Zimbabwe's government was accused of taking desperate measures last week, as it banned the multiple foreign currencies that have been in use in the economy for a decade, and reintroduced the Zimbabwean dollar. However, these could turn out to be shrewd moves.

A month ago we suggested there were glimmers of hope for Zimbabwe's battered economy, as long as the government either ditched its unloved temporary currency, the RTGS$, or took serious steps to build trust in it. Last week's reforms arguably do both, as long as the Zanu-PF regime, under President Emmerson Mnangagwa, also sticks to other recent promises.

A deal with the IMF last month required the Harare regime to stop borrowing/printing money to meet its public spending obligations (a root cause of current rampant inflation) and instead rely on tax, foreign investment and aid revenues. The central bank also vowed to stop manipulating exchange rates and allow the RTGS$ (now the Zimbabwean dollar, although the old bond notes will still be the notes used) to float. By banning foreign currencies from circulating (NB bank accounts currently denominated in them will be protected), the government has introduced an immediate need for people to get hold of local currency instead. That sudden strong demand has caused black-market exchange rates to strengthen sharply (latest USD 1 / ZWL 9, down from ZWL 13 a fortnight ago, as USD sellers now outnumber buyers). Indeed, street rates have almost converged with official ones (ZWL 8). The weakening of official rates (see first table below) has helped this convergence, but it is also a healthy sign that the central bank is sticking to its word and allowing the ZWL to float. If that continues, and assuming no more money-printing, people's trust in their currency's fair value should grow and the black market could even disappear.

Furthermore, although a weaker official rate would normally prompt a further rise in inflation, in this case, because of the shortages of hard currencies available through banks recently, imports have generally been priced according to black-market rates, and those have strengthened. So we could see inflation, which rose to 97.8% in May, start to fall quite quickly.

The danger is that, while the imbalances and confusion caused by divergent currency values and pricing could rapidly diminish, shortages of hard currencies, which have plagued the economy of late, could be replaced by shortages of Zimbabwean dollars instead, as money-printing declines and if the economy fails to grow. There obviously needs to be enough money in the system or it will jam up, so the government must quickly attract foreign investment and donor funding so that capital is injected. Simplifying the money system, as it did last week, is a major step towards that aim. If the government can also find a way to stop oppressing political opposition and liberalise society and other aspects of the economy, it might even turn Zimbabwe around.

Countries experiencing largest currency losses in June
Currency code Movement v EUR
3 Jun - 1 Jul 2019 (%)
Angola AOA -5 17.4
Haiti HTG -6 17.7
Liberia LRD -5 23.3
Malawi MWK -8 8.9
Pakistan PKR -11 9.1
Venezuela VES -12 282972.8
Zimbabwe ZWL -27 97.8

The kwacha of Malawi depreciated by 8% against the euro in June following a highly-disputed presidential election result in May and a growing political impasse. The country's inflation has also risen of late.

Angola's kwanza lost significant ground too, due to a sharp fall in oil production.

The other five countries whose currencies fell the most in June have appeared regularly in our biggest-currency-losses table recently, suggesting major problems in these economies. However, they all have high inflation, so for expatriates working in these locations, whose salary is paid at least partly in foreign currencies, the effects on purchasing power of the exchange rate and inflation factors will be offsetting each other to at least some degree.

In another strong month for the euro, only two currencies gained more than 2% against it, as the next table shows.

Countries experiencing largest currency gains in June
Currency code Movement v EUR
3 Jun - 1 Jul 2019 (%)
Argentina ARS +3 57.3
Colombia COP +3 3.3

In other currency-related news, there has been much excitement about the forthcoming (if they can get it past regulators - a very big 'if'!) launch of Facebook's Libra cryptocurrency, not least among the international human resources community, which immediately saw the potential for reduced remittance costs of transferring money between countries, and perhaps simpler methods of remunerating expatriate staff.

While Libra, the full details of which are yet to be worked out, may indeed offer these things and more besides, it also raises huge concerns and will face numerous obstacles before it ever comes to exist. In the meantime, global mobility teams and expatriates looking to cut remittance costs might prefer to investigate services already in operation, such as those provided by Revolut and Transferwise.

Finally, here is this month's selected-currency-movements table:

Selected currency movements (v EUR)
Country Currency code % movement to 1 July 2019 v EUR since: Latest official annual inflation (%)
(1 month)
(3 months)
(6 months)
(12 months)
Argentina ARS +3 +1 -11 -46 57.3
Australia AUD -1 -2 0 -3 1.3
Brazil BRL +1 +1 +2 +3 4.7
Canada CAD +1 +1 +5 +3 2.4
Chile CLP +2 -1 +3 -2 2.3
China CNY -1 -4 +1 -1 2.7
Egypt EGP -2 +2 +7 +9 14.1
India INR -1 -1 +2 +2 3.0
Indonesia IDR -1 -1 +4 +4 3.3
Japan JPY -1 +1 +3 +5 0.8
Kenya KES -3 -3 0 +1 5.5
Korea Republic KRW +1 -3 -3 -1 0.7
Mexico MXN 0 0 +3 +5 4.2
Nigeria NGN -2 -1 +2 +2 11.8
Norway NOK +1 0 +3 -2 2.5
Philippines PHP 0 +1 +3 +6 3.2
Poland PLN +1 +1 +1 +3 2.4
Russia RUB +2 +2 +10 +2 5.1
Singapore SGD 0 -1 +2 +3 0.9
South Africa ZAR +2 +1 +3 0 4.5
Sweden SEK +1 -1 -3 -1 2.2
Switzerland CHF +1 +1 +1 +4 0.6
Turkey TRY 0 -4 -9 -23 18.7
United Kingdom GBP -1 -4 +1 -1 2.0
United States of America USD -2 -1 +1 +2 1.8
Venezuela VES -12 -51 -91 -99 282972.8
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