ZIMBABWE’S local currency, the RTGS dollar, has plunged by as much as 16% since it was introduced last month.
The Reserve Bank of Zimbabwe scrapped its discredited 1:1 dollar peg for surrogate bond notes and electronic dollars last month, merging them into a lower-value transitional currency called the RTGS dollar as part of monetary policy measures to address the country’s currency challenges.
The RTGS dollar made its debut at 1:2,5 to the greenback on the official interbank platform, but on the parallel market, rates were as high as 3,5 to 3,8.
While parallel market rates have somewhat held steady, the official rate for the RTGS dollar has dipped to 2,8 to the greenback.
Economist Ashok Chakravarti said every new market takes time to settle in order to be fully functional, which is why the market was performing the way it was. But he called on the market to be free of controls that were determined by traders.
“When we proposed the interbank foreign exchange market, we did so with the mind that it would be liberalised in the sense of allowing the market to determine the rates free of controls,” he said.
“But I think those are issues that will be sorted as time goes on. But we need to have transference rules that can govern the interbank platform, like how the stock exchange has trading rules. This is because some banks have nostro accounts, while others do not have. I would encourage the Ministry of Finance and the central bank to quickly put these rules.”
Chakravarti added that transfer rules would also encourage trust among exporters and sellers so that they come onto the market in order to trade their foreign currency.
“The rate has devalued as a result of the Reserve Bank just increasing the exchange rate because all banks are depending on them for the supply of foreign currency. The bulk of foreign currency is being supplied by the Reserve Bank because generators of foreign currency are holding onto their foreign currency,” financial expert Persistence Gwanyanya said.
“The reason why they are holding onto their foreign currency is because the exchange rate would be deemed to be less attractive compared to the exchange rate they have been getting from their individual structures. So the Reserve Bank has deliberately increased the rate at which the banks are accessing foreign currency from it because the market is not releasing foreign currency; suppliers are not ‘coming to the party’.”
Gwanyanya said the central bank was not too keen on the “big bang” approach in dealing with currency distortions as the bank believes this would negatively impact the economy.
“As I have advised previously, we are reaching equilibrium on the interbank forex market. I think you are using the term ‘devaluation’ in the wrong context. Equilibrium between the supply and demand for forex based on willing buyer, willing seller basis,” Mangudya told NewsDay.
However, Gwanyanya was of a different view about the effect of foreign currency on tobacco sales, as buyers and sellers were already trading among themselves using the more lucrative parallel market rates.
“To me, it is not about the availability of foreign currency. It is about the attractiveness of the rate to the suppliers of foreign currency.
Remember, the suppliers are going to supply into the interbank market from their retentions. They are retaining the foreign currency and others are continuing to hold onto the foreign currency,” Gwanyanya said.
“Until the price discovery mechanism is arrived at, we shall see a situation where we have foreign currency that may seem to be enough to cater for the needs of the market, with generators of foreign currency continuing to hold onto their foreign currency.”
Gwanyanya said too much control from the central bank was exacerbating the problem.