Shock fall in Zim dollar prompts government action

The tumbling Zimbabwe dollar, which dropped by 29% in just 10 days, has prompted the country’s government to announce a raft of measures meant to stabilise the exchange rate, including a minimum interest rate on deposits.

The local currency, which was introduced in February last year at a rate of 2.5 to the US dollar, closed the month of February 2020 trading at an exchange rate of 31 to the greenback on the parallel market, where it had slid to 42 to the US dollar by Friday this week.

Although the Zimbabwe dollar was trading at 18.29 to the US dollar on the official market on Friday, insufficient foreign currency has driven economic players to turn to the parallel market, where rates are at around a 100% premium.

What has also driven forex earners from disposing foreign currency on the formal market is the decision by the central bank to manage the exchange rate by restricting margin movements to just 3% from the bank’s own inter-bank mid-rate.

Speaking at a press conference at the central bank’s Harare head office earlier in the week, Finance and Economic Minister Mthuli Ncube said the Reserve Bank of Zimbabwe was introducing a foreign currency trading system – which he called the Reuters System – with immediate effect.

The system is expected to have minimal influence from the central bank, apart from managing the float through buying and selling foreign currency like other reserve banks across the world.

Ncube said the central bank is also expected to terminate its gold incentive facility, which critics have argued fuelled inflation and currency depreciation by increasing money supply.

In 2019, money supply in Zimbabwe grew by 245% against a target of just 10%.

The central bank is also expected to mop out excess liquidity through the use of open market operations as well as introducing corporate bonds, said Ncube.

To reduce growing appetite to buy foreign currency as a way of saving, Ncube said the central bank will introduce a minimum interest rates for all banking sector deposits to incentive savings and the use of the local currency.

Shock fall in Zim dollar prompts government action