May currency review

Further details have emerged of Zimbabwe's latest exchange rate reform, with confirmation of a huge devaluation. The interbank rate is the new official reference rate, registering USD 1 / ZWL 291 on 31 May, having replaced the old auction-derived official rate, which stood at USD 1 / ZWL 166 at the beginning of the month. The auction rate still functions, but has also been heavily devalued and is currently only 3.7% overvalued compared to the interbank rate. The interbank rate now applies to credit card transactions too. The move reflects the fact that economic conditions continue to deteriorate. Inflation, which had until recently been coming down, jumped back up to 131.7% in April from 72.7% in March. Meanwhile, exchange rates available on the black market are reportedly around USD 1 / ZWL 420, meaning that further central bank devaluations may be needed. Zimbabwe's long-term difficulties have been well documented, but its situation has been worsened by Russia's war in Ukraine, which has greatly added to food and energy prices, exacerbating hard currency shortages in the country.

Indeed, the pressures stemming from the attack on Ukraine are harming numerous developing economies in particular. Our table of largest currency losses in May is basically a list of those nations with the biggest long-term economic weaknesses, and shows that when external crises hit them, such countries find they have little to fall back on to support their economies, or their currency values. It is particularly alarming to see Argentina, Turkey and Venezuela return to this table, all of which had recently found a degree of stability following long downward exchange rate trends.

Countries such as El Salvador and Central African Republic, which have adopted Bitcoin as legal tender, are hoping it will save them from the unpredictability and volatility of exchange rate markets, especially in these troubled times. Unfortunately, Bitcoin's future as a payments network is very much in doubt.

The Russian rouble continued its fightback from the steep falls it endured immediately after the Ukraine invasion began (see next table). A combination of capital controls, higher interest rates and the fact that many fewer foreign exchange transactions can now take place because of sanctions, has enabled the central bank to bolster the rouble's value. However, when it cut interest rates back somewhat at the very end of May, the rouble dived 13%, so this is a balancing act that will be impossible to maintain for long.

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