THE Reserve Bank of Zimbabwe (RBZ) has doubled down on efforts to curtail Zimbabwe dollar exchange rate volatility, with the apex bank delaying releasing the eagerly awaited 2024 monetary policy statement (MPS) to finalise modalities for introducing the country’s impending structured currency.
RBZ Governor Dr John Mangudya told Business Weekly on Thursday, that there was concurrence within the Government and key institutions of the State that weaknesses associated with domestic currency were responsible for driving the exchange rate volatility, which is blamed for fueling inflation in the country.
The inflation rate in Zimbabwe increased to 47,60 percent (annualised) in February from 34,80 percent in January of 2024. The rate averaged 42,63 percent from 2009 until 2024, reaching an all-time high of 785,55 percent in May of 2020 and a record low of minus 7,50 percent in December of 2009.
At the peak of the inflation crisis in 2008, Zimbabwe’s annual inflation rate climbed to a record 500 billion percent, according to the International Monetary Fund (IMF).
Mangudya said there was acknowledgment among authorities in Government and key institutions like the central bank and Treasury that Zimbabwe’s economic growth was being driven by foreign currency while rapid inflation was a consequence of the unstable and depreciating local currency.
“So, as I said before, we want to ensure that we stabilise the currency,” Mangudya said in an interview, adding the bank had delayed releasing the 2024 MPS to complete ongoing work on the structured currency.
President Mnangagwa recently said the Government was working on introducing a structured currency to curtail rapid inflation increases driven by depreciation.
Addressing a post-Cabinet briefing at State House on February 6, 2024, the President said the Government would introduce the structured currency to arrest price hikes while creating a conducive economic environment.
Mangudya said the central bank was working to put in place the framework to make sure the new currency has a valuable anchor that backs it.
“We are working to ensure that the structured currency is anchored, and backed. When the President announced that there would be a structured currency, it meant there should be a structure to back that currency.
A structured currency is a mix of a fiat currency, whose value derives from trust in the government regulations and the central bank’s monetary policies, and a physical commodity-backed currency stored in a vault somewhere.
“The very instrument that supports the currency is what he was talking about. For instance, a building has a foundation, what it means is that we are working on the foundation to ensure the structure stabilises the currency.
“That structure requires us to put in place a mechanism that anchors that currency.
In Zimbabwe, right now, 80 percent of our transactions are in forex, and 20 percent of transactions are in local currency. There is no challenge with (forex transactions), growth comes from there.
“Exchange rate volatility comes from (local currency) transmit volatility which goes into the pricing system. That correlation is what is called pass-through effects on domestic prices.
“It means we are all now agreed within the Government that we have growth, which is being disturbed by this volatility.
“As such, we have growth with inflation,” Mangudya said.
He said the stability expected to come through the structured currency would instill confidence, as economic agents would see the anchor instrument or an asset backing the new currency.
“If we give value to this structured currency, that value is not derived from the paper currency one will be holding, but from the asset backing it. Once we have such an arrangement, the medium of exchange becomes stable.”
Mangudya said the instrument to back or anchor the currency was what the central bank and Government were working on to determine, which should be announced in the 2024 MPS.
Mangudya said once the framework and operational modalities for the structured currency were put in place, authorities would then work on availing the necessary liquidity to operationalise the structured currency. – Business Weekly
