Business leaders and economic analysts in Zimbabwe are urging the Reserve Bank of Zimbabwe (RBZ) to adopt a truly market-driven exchange rate system. They argue that the current Willing-Buyer-Willing-Seller (WBWS) system, introduced in April 2024, while intended to be market-based, remains too controlled, leading to inefficiencies and foreign currency shortages.
By Martin Kadzere and Golden Sibanda
The WBWS system was designed to replace the previous foreign currency auction system, allowing buyers and sellers to negotiate directly for foreign currency. Despite this, persistent shortages of foreign exchange have hampered businesses, particularly those needing hard currency for importing critical raw materials.
Many companies are reluctant to sell their foreign currency holdings due to concerns over potential devaluation and the belief that the current exchange rate does not reflect the market’s reality. While authorities have dismissed these claims, asserting that there is sufficient liquidity in the market to meet legitimate foreign currency demands, some businesses are reportedly using foreign currency as a value-preserving mechanism amid fears of a devaluation.
Authorities also argue that some businesses, despite generating foreign currency through sales, prefer to hold onto their foreign exchange rather than use it for imports, placing additional strain on the interbank market.
Since the introduction of the ZiG and the establishment of the interbank foreign exchange market in April 2024, the exchange rate has remained relatively stable, averaging around ZiG13.6 to US$1. However, alternative market rates spiked in August, reaching ZiG24 to US$1, signaling growing divergence between the official and parallel markets.
Despite the RBZ’s intervention, with approximately US$190 million having been traded on the interbank market between April and early August, liquidity issues persist. Monthly forex allocations under the WBWS system, averaging US$38 million, are significantly lower than the US$70 million that flowed through the previous auction system.
This discrepancy, coupled with a backlog of US$90 million from the transition to the ZiG, has exacerbated the challenges faced by businesses in obtaining sufficient foreign currency. Analysts believe that until these issues are resolved, the ZiG will continue to struggle for widespread acceptance.
The Confederation of Zimbabwe Industries (CZI) recently highlighted the struggles faced by businesses in acquiring foreign currency, warning that this could undermine the acceptability of the ZiG. In its inflation and currency update, CZI noted that excess demand for US dollars should have led to a significant depreciation of the ZiG, had the exchange rate been truly market-determined.
Farai Mutambanengwe, CEO of the Small Enterprises Association of Zimbabwe (SMEAZ), echoed these sentiments, stating that a market-driven exchange rate is essential. He pointed out that the RBZ’s official rate of ZiG13.82 is out of sync with the street rate of ZiG23, which is leading to price hikes and increasing risk of rejection of the ZiG.
Economist and former monetary policy committee member Eddie Cross added that the current system is creating opportunities for arbitrage, with people exploiting the exchange rate disparities to make profits. He cited examples of retailers such as OK Zimbabwe, which are struggling to offload ZiG in a market where US dollars are scarce.
Cross argued that the solution lies in allowing the market to determine the exchange rate, suggesting that Zimbabwe should move towards a monocurrency system where all foreign currency is remitted to the RBZ and converted as needed. “We need to use our own currency, like South Africa, Namibia, Mozambique, and Botswana, where the exchange rate is liberalized,” he said.
Professor Gift Mugano, an economics expert, pointed out the flaws in the current system, stating that a controlled exchange rate is unsustainable in the face of foreign currency shortages. He argued that liberalizing the exchange rate would better reflect the true value of the ZiG and help restore economic stability.
The Confederation of Retailers Zimbabwe (CRZ) also voiced concerns, stating that the volatility of the exchange rate is disrupting supply chains and making it difficult for businesses to recover their investments. The current system, they argue, is creating a liquidity trap where businesses hold significant stocks of ZiG but cannot access enough foreign currency to meet their import needs.
Retailers are particularly affected by suppliers who demand payments in a split of 85% US dollars and 15% ZiG, further complicating efforts to maintain adequate stock levels. Some manufacturers have reported receiving as little as US$10,000 on the interbank market, against monthly requirements of US$400,000.
The RBZ’s recent interventions, including the conversion of the US$90 million backlog into a tradable government bond, have not fully alleviated the pressure on the foreign exchange market. Executives in the manufacturing sector have expressed concern that without sufficient access to foreign currency, businesses will continue to struggle, threatening the broader economy’s recovery.
FBC Holdings, in its 2024 Mid-Term Monetary Policy Statement analysis, also noted the limitations of exchange rate targeting in Zimbabwe. It highlighted factors such as a lack of confidence, inconsistent policies, and external economic pressures as major hurdles. For exchange rate targeting to work effectively, the country would need stable macroeconomic fundamentals and consistent policy measures to restore trust in the local currency.
As Zimbabwe continues to navigate its currency challenges, the call for a market-driven exchange rate grows stronger, with business leaders and analysts advocating for liberalization as the key to unlocking economic stability and growth.
Source: Business Weekly