Zimbabwe Central Bank Rules Out Free-Floating Currency After 26% Slump

Persistence Gwanyanya
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HARARE (Bloomberg) — Zimbabwe has ruled out free-floating its local currency, a day after its dollar slumped 26% on the official market and a report urged looser foreign-exchange controls.

Authorities in the country instead still support a “managed float” that countries around the world use for their currencies, said Persistence Gwanyanya, a member of the Reserve Bank of Zimbabwe’s Monetary Policy Committee.

“The notion of free-floating the currency is unrealistic,” he said Wednesday in a phone interview. “While we want increased market forces, we can’t leave the exchange rate completely to the private sector.” Left on its own, there is the potential risk to “spin markets out of control,” he added.

The comments follow a joint report Tuesday by the country’s Competition and Tariff Commission and National Competitiveness Commission that said the market should set both the exchange rate and prices for basic goods and services.

Read: Zimbabwe Dollar Slumps 26% as Report Urges Looser Controls

The Zimbabwe dollar has weakened 65% so far this year against the US dollar. It now officially trades at 1,888 per US dollar, from 660 at the start of the year. It is much weaker on the black market where it trades between 2,300 and 3,600 Zimbabwe dollars per greenback, according to websites including ZimPriceCheck.com and ZimRates.com that track both official and unofficial exchange rates.

Monetary authorities are concerned with fixing a widening gap in recent weeks between the official and unofficial exchange rates, which is fueling price distortions in the economy.

“We have never seen convergence to the parallel market as a priority, but equilibrium,” said Gwanyanya. “It’s clear we have been pushed out of equilibrium, to get back that may entail some level of depreciation of the local unit.” At least a 20% premium between the two rates is seen as acceptable, he said.

The southern African nation will still keep a multi-currency system and will not ban use of the US dollar, which is the most dominant currency in the economy. It accounts for 77% of all transactions. The greenback is used to pay for everything from fuel and food to medicines. Its circulation in the country is guaranteed in law until 2025.

To help reduce demand for US dollars, the central bank earlier this month launched digital tokens, backed by gold reserves, as the value of the local currency plunged. The move was criticized by the International Monetary Fund, which urged the government to liberalize its foreign-exchange rate rather than risk depleting its reserves.

“We don’t want to flip-flop on policies,” Gwanyanya said. “We would rather have competition to the US dollar, of which we have done that, in the promotion of the gold-backed digital tokens.”