Reserve Bank of Zimbabwe governor John Mangudya has touted introduction of the interbank foreign currency market as having helped stabilise exchange volatilities. File Photo: IOL
HARARE – About US$799 million (R11.62billion) has been traded on Zimbabwe’s official interbank foreign currency market, with the central bank hiking interest rates to 70 percent and introducing foreign currency savings bonds, the governor of the Reserve Bank of Zimbabwe said on Friday, highlighting that inflation would be tamed in the medium- to long-term outlook.

Reserve Bank of Zimbabwe governor John Mangudya has touted introduction of the interbank foreign currency market as having helped stabilise exchange volatilities. Parallel market and formal market exchange rates have appeared to converge as banks and bureau de changes ramp up their activities on the foreign currency markets following liberalisation of the exchange rate regime this year.

“The introduction of the interbank foreign currency market was meant to address the foreign currency grid-lock arising from widening parallel market activities by harnessing foreign exchange through the formal market,” Mangudya said in the mid-term monetary policy statement on Friday.

According to central bank data, as much as US$799 million in foreign currency has been traded on the official interbank market for forex in Zimbabwe. Prior to this, those holding foreign currency shunned formal channels because of the 1:1 exchange rate for local currency and US dollars.

Zimbabwe has also moved to introduce US dollar denominated savings bonds to “promote a savings culture and to provide reasonable return on (foreign currency accounts) deposits” as well as “US dollar cash balances held by individuals and firms” inside Zimbabwe.

The new US dollar savings bonds will bear interest of 7.5 percent per year; have a minimum tenure of one year; will have tax exemption; and assume liquid asset status in addition to acceptability as collateral for overnight accommodation by the central bank.

This comes as the Reserve Bank of Zimbabwe has noted an increase in the demand for physical cash, which it describes as worsening, with unending queues at most banks in the country. Premiums on bond notes have also started to spike.

“Visitors to the country including tourists are failing to access cash for their domestic transactions, as they are supposed to buy local currency cash from banks or bureaux de change,” Mangudya explained.

He highlighted that the central bank was now geared to inject additional notes and coins on a gradual basis to support productivity and lessen the inconvenience caused by physical cash shortages to the transacting public.

“The cash injections will not result in an increase in money supply as banks will use their existing RTGS balances to exchange for cash.”

Economists are, however, worried that additional injection of cash into the economy will fuel price increases through broadening money supply. The central bank has curtailed the usage of bank balances for informal parallel market foreign currency dealings through hiking the overnight borrowing rate to 70 percent, which has been viewed by some economists as marking Zimbabwe’s return to hyper-inflation.

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