Zimbabwe moves towards exchange rate stability

Professor Chakravati
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MEASURES introduced by the Reserve Bank of Zimbabwe (RBZ) just over a month ago to stymie a precipitous Zimbabwe dollar exchange rate volatility have yielded positive results thus far, economic analysts have said.

This comes as the Zimbabwe dollar has enjoyed relative stability since the central bank introduced the foreign exchange auction trading system and imposed tight restrictions on mobile money agents.

The rate has moved from the fixed exchange rate regime of 25 to 1 against the US dollar, which was adopted in March this year to ensure price certainty following the outbreak of the coronavirus, to 76,76 to 1 at the last auction last Tuesday.

While the Zimbabwe dollar has lost ground continually against the greenback since the inaugural auction on June 23, the depreciation in the last three weeks, has largely been gradual, modest and in line with the objective to facilitate market led price discovery.

Before the RBZ adopted the auction system and with the fixed rate in operation, the open market rate had continued to increase, which resulted in holders of forex withholding their money arguing the official rate had become sub-economic.

This resultantly caused market starvation, fuelled currency instability and inflation, which vaulted from 5,39 percent in September 2018, before the multicurrency system was scrapped, to 785,6 percent by May 2020, then dropping marginally in June to 737 percent.

Without a systematic price discovery mechanism, the market relied on its whims, which were often hijacked by speculators, to determine the exchange rate and this resulted in volatility that drove prices and inflation, as business adopted forward pricing strategies to cushion themselves from the escalating rate.

“I think the primary source of the current stability in the market is the forex auction system; it has had dramatic impact even though it is involved in 12-15 percent of the foreign exchange on the market.

“The result has been price discovery on the formal market and has been able to meet essential imports requirements and in the background, action taken against (mobile money agents) has had considerable effect in that process because it has dried up what was the source of instability in the market,” according to Monetary Policy Committee member, Mr Eddie Cross.

Mr Cross said what was puzzling though was the sudden and dramatic increase in money supply growth over the last couple of weeks, with the RBZ’s monetary policy committee currently baffled over the unexplained source of the liquidity.

Latest RBZ figures for the week ended 17 July 2020 show reserve money balance at $17 billion up from $14,3 billion the previous week, largely on account of increased Government expenditures, which saw Government surplus position moving from $8,0 billion to $6,3 billion as at the end of the review period.

Observers believe the monetary authorities should now move swiftly to introduce additional policy measures to entrench the auction and its role as a price discovery mechanism, the prevailing sanity in the market and price stability.

Economist, and member of the RBZ monetary policy committee Professor Chakravati said in an interview that in his opinion, the RBZ should introduce regulations compelling exporters to offload part of their holdings on the auction.

Prof Chakravati said it was a disturbing situation that the country’s stock of foreign currency has been growing exponentially, now standing over US $1,1 billion, yet the country is starved of foreign currency for key imports that include raw materials.

“In my opinion, given the current state of our foreign exchange, as we are starting to liberalise, we cannot have a situation where exporters are allowed to keep 70-80 percent of their foreign exchange proceeds.

“In other countries that are beginning to liberalise exporters are normally allowed to retain maybe 20-30 percent of their foreign exchange. I am not suggesting that we be radical, but what I am saying is that for some proportion of the existing retentions held by exporters, we must require them (exporters) to start selling on the auction market,” he said.

Prof Chakravati said regulations compelling exporters to sell a significant threshold of their holdings on the auction at preferred rates would enable the auction system to cover requirements for small imports.

Analysts believe that if the US$3,5 million sold by banks daily was sold on the auction market, plus an average of US$15 million traded by the RBZ on the same platform every Tuesday, the new system would cover all applications brought to the auction every week.

In terms of the standing rules of the auction system, only importers seeking amounts above US$50 000 up to a maximum of US$500 000 are allowed to participate on the market; and can also only make a single bid. It means the majority of those seeking forex either approach banks after the Tuesday weekly auction and buy at the market rate established on the auction; which is the weighted average of completed deals. – Herald