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Zimbabwe experiments with exchange rate liberalisation

ZIMBABWE is to experiment with a liberalised foreign currency exchange rate after allowing corporates and individuals holding US dollars in their accounts to sell the hard currency to banks on a willing seller and willing buyer basis. | EPA

ZIMBABWE is to experiment with a liberalised foreign currency exchange rate after allowing corporates and individuals holding US dollars in their accounts to sell the hard currency to banks on a willing seller and willing buyer basis. | EPA

Published Apr 6, 2022

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ZIMBABWE is to experiment with a liberalised foreign currency exchange rate after allowing corporates and individuals holding US dollars in their accounts to sell the hard currency to banks on a willing seller and willing buyer basis.

Exchange rate distortions have blighted Zimbabwe’s economy, which continues to struggle to attract foreign direct investment. Exchange rate disparities have also driven up year on year inflation to 72 percent for the month of March, according to data from Zimstats.

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The Reserve Bank of Zimbabwe, under pressure from industry and international finance institutions to fix the exchange rate regime, has now set a $1 000 (R14 447) limit for the amount that companies and individuals can trade on a willing seller willing buyer basis with banks.

At a meeting of the Monetary Policy Committee (MPC) this month, the central bank resolved to further liberalise the foreign exchange market “by allowing banks to conduct foreign exchange transactions of up to $1000” under arrangements and parameters agreed to by the apex bank.

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This will be “in terms of which individuals with free funds and entities/corporates holding foreign exchange in their foreign currency accounts shall be free to sell foreign currency to banks on a willing-buyer-willing-seller” basis.

Chiedza Madzima, the head of operational risk at Fitch Solutions, described the new exchange rate measures by Zimbabwe as a “slight easing of FX (forex) controls for foreign currency account” holders, including corporates.

Some exporters in Zimbabwe are required to liquidate their export receipts at the official exchange rate, which lags the much more realistic street rate by over 100 percent. The official exchange rate is pegged at around $1:ZWL130, while the parallel market exchange rate has raced to $1:ZWL250.

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“The new measures have the goal of leveraging off the growing (foreign currency balances) in the country to ease impending currency volatility,” analysts at Morgan and Company said in an economic report on Tuesday.

They added: “The role (of the forex measure) is to incentivise holders of nostro (foreign currency) balances to dispose their currency at rates that are better than the official rate but below the parallel market rates.”

The Zimbabwean monetary policy’s resolution to experiment with a partly liberalised exchange rate regime is in addition to other monetary shifts that saw the central bank hike policy rates.

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John Mangudya, the governor of the Reserve Bank of Zimbabwe, announced a hike in the bank policy rate from 60 to 80 percent and reviewed upwards the medium-term bank accommodation facility interest rate from 40 to 50 percent.

He also said the MPC had further tightened monetary policy by reducing the quarterly reserve money growth target from 7.5 percent to five percent for the quarter to the end of June.

“The increase in the bank policy rate will likely increase the burden of debt financing for borrowers through higher interest rates in the short to medium term. Companies that extensively rely on debt for working capital needs will be exposed,” the economic brief by Morgan and Company adds.

The has recommended “monetary tightening, given the persistently high inflation” ravaging Zimbabwe.

International Monetary Fund (IMF) directors have also emphasised “the need to increase the operational independence of the central bank, discontinue its quasi-fiscal operations and improve its coordination” with fiscal authorities.

“Concerted efforts are needed toward greater exchange rate flexibility by allowing a more transparent and market-driven price process. Directors called on the authorities to phase out exchange restrictions and multiple currency practices as soon as conditions permit,” said the IMF.

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