Zimbabwe abandons 1:1 currency peg with the US dollar

Zimbabwe Reserve Bank Governor John Mangudya.
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HARARE – Zimbabwe has a long history of currency instability and in 2009 introduced the dollar, euro and rand as legal tender after a wild round of hyperinflation.
In 2016, the central bank introduced the quasi-dollar to trade 1:1 with the dollar but it’s now abandoning that peg. The move is simply acknowledging what’s already happening in the black market, where the quasi currency trades at 3.6-3.8 to the dollar.
I don’t think Zimbabwe is going to set off a round of emerging market currency volatility but any time that someone abandons a peg, it leads to some jitters in places that hold pegs, like Saudi Arabia and Hong Kong.

Mangudya responds to questions below:

We are taking the role of ensuring that the value of money is restored instead of leaving that to the parallel market. The variable that is critical to us is the inflation. The best way to preserve value for money is to ensure that foreign curency is available and that the forex rate is stable.

Right now the value of money is being eroded by the parallel market.

If we continue with 1:1, the money will be eaten by inflation, which is caused by the pass-through effects of the parallel exchange. The best way to restore value of money is therefore to ensure that we manage inflation and the stability of the exchange rate.

if the rate goes down from 4 to 2.5 it means we are preserving the valaue of money.

Right now we are so encourage by the fact that the fiscal side of the equation is ok. Because of the measures we took.

Our target for the rate even though we have left it at willing buyer willing seller we manage runaway inflation in a couple of ways:

  • we have ines of credit to stabilise exchange rate
  • the interbank will provide foreign currency to bonafide transactions not for the purposes of funding foreign currency accounts.
  • we will be watching those who are attempting to manipulating the rates. Our Anti-money laundering monitoring will check on those with too much money in their accounts. We will monitor in terms of the laws in Zimbabwe.

We don’t expect a run-away rate of the exchange rate. We expect the exchange rate to go down.

We have formalised the way to buy foreign currency so that people don’t do it illegally.