Zimbabwe sets up foreign exchange market to preserve currency value

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A street money changer counts South African Rands in Harare, Zimbabwe, May 5, 2016. REUTERS/Philimon Bulawayo - RTX2CZDI

Zimbabwe on Wednesday established a foreign exchange inter-bank market to formalize trading of foreign exchange and bring stability in the forex market.

Presenting the long-awaited 2019 monetary policy statement, Reserve Bank of Zimbabwe governor John Mangudya said the trading of Zimbabwe’s Real Time Gross Settlement (RTGS) bank balances, also known as electronic dollars, bond notes and coins with the U.S. dollar and other currencies will be done on a willing buyer willing seller basis.

The RBZ had thus converted the RTGS balances, bond notes and coins in circulation into RTGS dollars which will now be traded through banks and bureaux de change at market rates, Mangudya said.

He said the inter-bank market will help restore value for money which was being eroded by parallel market exchange rates.

“The RTGS dollars thus become part of the multi-currency system in Zimbabwe. The legal instrument to give effect to this has been prepared,” he said.

“We are taking over our rightful role to ensure value for money is restored.”

The RTGS dollars join other nine currencies in the multi-currency basket adopted by the country in 2009 after the Zimbabwe dollar was rendered worthless by hyperinflation.

The multi-currency basket comprises the Euro, U.S. dollar, British Pound, Australian dollar, Canadian dollar, Chinese yuan, Indian rupee, the South African rand and the Botswana pula.

Mangudya said the use of RTGS dollars for domestic transactions will help eliminate multi-pricing system and charging of goods and services in foreign currency.

“In this regard, prices should remain at their current levels and or to start to decline in sympathy with the stability in the exchange rate given that the current monetary balances have not been changed,” Mangudya said.

Zimbabwe is facing an acute shortage of foreign exchange which has led to the emergence of the parallel market for forex where the local bond note is trading at between 3 and 3.50 to the U.S. dollar, up from 1.80 in October last year.

The high rate has resulted in the increase in prices of goods and services as most suppliers are sourcing their foreign currency on the black market. This has also fuelled inflation which has jumped from 5.4 percent in September last year to 42.09 percent in December 2018.

Mangudya stated that the central bank decided to set up the forex market after realizing that the continued use of the U.S. dollar as a unit of account when its RTGS value has declined could pose the risk of a costly de-dollarization which would move the economy into a recession.

He said this was evidenced by the fact that some businesses were already gradually reducing prices due to low demand while exporters were fast becoming uncompetitive.

The inter-bank forex market would thus go a long way in rebalancing the economy and setting it on a sustainable growth trajectory, Mangudya said.

“The new framework is set to bring certainty, predictability and functionality to the economy’s foreign exchange market,” the governor said.

He said overall, the move was expected to reduce inflation and improve the competitiveness of the economy by appropriately rewarding exporters while at the same time reducing price distortions and arbitrage within the domestic market

He said safeguards will be put in place to prevent foreign exchange rates from spiraling.

Mangudya said the central bank had arranged sufficient lines of credit to support the forex market, adding bureaux de change shall sell foreign currency for small transactions up to a maximum daily limit of 10,000 per bureau de change.

Mangudya said gold exporters will retain 55 percent of their export receipts while tobacco and cotton merchants will retain 80 percent and growers of the two cash crops will retain 30 percent.

“Similarly, in order to enhance liquidity within the foreign currency market, exporters shall be entitled to utilize their retained export receipts within 30 days, after which the unutilized export receipts will be offloaded into the market at the prevailing market exchange rate,” Mangudya said.

He said all international remittances and individual funds received from offshore shall continue to be treated as free funds. Enditem

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