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Zim eases grip on new currency in bid to end dollar squeeze

Bloomberg/Business Reporter
For investors who doubted Zimbabwe would let market forces determine the price of its new currency, there’s evidence it’s doing just that.

The southern African nation’s central bank has allowed the currency, known as RTGS, to slide to 2,6481 per dollar this week, taking its depreciation since trading started on February 22 to 5,6 percent.

That marks a change from the previous fortnight, when it was stuck at almost exactly 2,5.

There’s still a wide gap with the black-market rate of 3,55, according to marketwatch.co.zw, a website run by financial analysts in Harare, the capital. But it’s closing thanks to the latest bout of depreciation.

Investors won’t be satisfied the country’s dire shortage of foreign exchange — which has destroyed the economy and led to shortages of bread and fuel — is over until the two rates converge.

RTGS, which stands for real-time gross settlement, was the result of the central bank’s decision years ago to print an electronic version of real dollars to fund rampant government spending.

Hyperinflation forced the nation to abandon its original currency in 2009.

For long, the Government and central bank insisted that RTGS had the same value as greenbacks, even as it plummeted in the black market. Officials relented last month by opening a formal interbank market for RTGS.

Said the RBZ: “The current monetary arrangements, if maintained, could pose the risk of a costly re-dollarisation of the economy which will move the economy into a recession.

“Introduction of a market determined mechanism for trading of US dollars with RTGS balances and bond notes has become imperative,” the central bank said as it announced the foreign currency trading system which would be determined by market forces.

Finance and Economic Development Minister Mthuli Ncube is on record saying the debut of the interbank market has been successful and treasury is very pleased that this market has taken off.

“We moved from a fixed exchange rate to a floating managed exchange rate. By managed, we don’t mean managing the average rate; we mean managing the volatility. It’s about volatility, it’s not about setting the rate at all. The rate is what it is in terms of market forces.

“ . . . Going forward, anything that we do in terms of coming into the market is to manage the volatility but not to intervene. Government is staying out of the market because we are too big. If we go in there we distort the market,” he said.

RBZ governor Dr John Mangudya also denied manipulating the exchange rate saying the rate will reach its equilibrium position. He said the 2,5 was just a start rate and the market will find its equilibrium depending on market forces.

source:the herald

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