Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya on Friday expressed confidence in the direction the economy is taking in terms of achieving exchange rate and price stability.
A key role of central banks across the globe is to conduct monetary policy to achieve price stability — low and stable inflation — as well as exchange rate stability.
According to Christine Lagarde, president of the European Central Bank and former IMF boss, price stability is important because if it is not there, the economy cannot function in a sustainable, solid way.
“Whether you look at the corporates, families, governments, price stability is a key element in order to actually decide to invest, employ or enter into such or such fiscal policies,” said Ms Lagarde.
Local annual inflation reached a 10-year high of 786 percent in May 2020, while the exchange rate has moved from a peg of $1:1 to the US dollar to the current official rate of $68,8.
The parallel market rate is now between $90 and $100 to the greenback.
However, Dr Mangudya expects the trend to reverse following the successful launch and growing reliance on the foreign currency auction system by business.
As expected, holders of foreign currency are slowly coming with their offers to the official market at their own reserve exchange rate.
Fielding questions during a Webinar hosted by the Confederation of Zimbabwe Industries (CZI) on Friday, Dr Mangudya said the exchange rate is already flattening on both the formal and parallel market.
Month-on-month inflation, he said, is now forecast to drop to as low as 5 percent in the next few months.
“Our job here is about price stability. Right now we are pleased by the fact that the parallel exchange rate has not been increasing over the past four weeks.
“We have seen that there has been a curve that is going downwards and the rate is flattening at that level,” said Dr Mangudya.
The auction system, he added, will not entirely eliminate the parallel market.
In some jurisdictions, at least 10 percent of foreign exchange goes through the informal market.
Monetary authorities, however, believe that what is important is flattening the premium between the market exchange rate and the parallel market exchange rate.
“We need to have about 80 to 90 percent of transactions to take place in the formal market. We believe we are narrowing the curve.”
He said because of what is happening on the foreign currency front, outlook for month-on-month inflation from July 2020 onwards should not be more than 5 percent.
Inflation should be between zero and 5 percent from July going towards the end of the year, resulting in a year-on-year inflation outlook of 300 percent, said Dr Mangudya.
But the inflation outlook will depend on the continuous success of the foreign currency auction trading system.
Dr Mangudya said the blended inflation, which takes into account goods and services charged in foreign currency, should be much lower.
For June, the blended month-on-month inflation stood at 29,4 percent, gaining 15,9 percentage points on the May rate of 13,5 percent.
The blended CPI for the month ending June 2020 stood at 557,19, compared
to 430,45 in May 2020 and 100 in June 2019.
On whether the country was not re-dollarising given the dual pricing and increased transactions in foreign currency, Dr Mangudya said the economy is still within its de-dollarisation roadmap, although the multicurrency system is still in place.
“Right now we are in de-dollarisation roadmap. What does dollarisation
“It means we are measuring the value of the USD in the economy and right now we have US$1 billion in the
nostro accounts, being deposits, and if we multiply that by the exchange rate, it means we have $68 billion in USD, while local currency deposits are approximately $40 billion.”
He said the country has more money in US dollars in terms of value (63 percent) and less in Zimbabwe dollars (37 percent).
“What then is chasing the US dollar when Zimbabwe dollars are lower than foreign currency?” asked Dr Mangudya.
He also gave a breakdown of the $40 billion in local currency, which is made up of $22 billion in loans, while $8 billion is in Treasury Bills and Savings Bonds.
The balance of $10 billion is in reserve money.
Dr Mangudya said to encourage the use of the local currency, there is need to ensure that Government and its departments charge for services in local currency.
“We need to increase the demand for the Zimbabwe dollar and the way to increase the demand is for parastatals, public entities to charge in Zimbabwe dollar.
“Maybe if they so wish, they can index to the auction rate but not to ask payments to be made in US dollars,” Dr Mangudya said.