Prices stability to be sustained — RBZ

Debra Matabvu

THE limited number of foreign currency sellers under the current willing-buyer, willing-seller system, especially in a trading environment where domestic transactions can still be settled in US dollars, had created unrealistic pressures on the local unit and caused the recent bout of currency instability, Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mushayavanhu has said.

He also said the adjustment of the official exchange rate on Friday was in response to temporary exchange rate pressures that are not linked to the country’s economic fundamentals.

In an interview with The Sunday Mail yesterday, Dr Mushayavanhu said an artificial surge in demand for foreign currency, coupled with inflationary pressures, had prompted the adjustment.

To address these pressures, the RBZ on Friday set the new official exchange rate at ZiG24,3:US$1, up from the previous trading range of about ZiG14:US$1.

The multi-currency trading arrangement, added Dr Mushayavanhu, had led to a disproportionate demand for foreign currency, with buyers hesitant to convert their US dollars to the local currency.

“The current interbank foreign exchange market under the willing-buyer, willing-seller trading arrangement has always allowed market forces to determine the exchange rate, while the backing of the ZiG using gold and other reserve assets is critical for ensuring limited exchange rate volatility caused by transitory demand-supply shocks,” he said.

“However, the challenge with the multi-currency system is that there are limited sellers of foreign currency, making it a buyers’ market, as generators of foreign currency have an option to settle domestic transactions in foreign currency, hence less incentives for them to convert.”

As a result, he said, the central bank has been the major supplier of foreign currency in the market.

“Under the current exchange rate arrangement, the Reserve Bank can intervene in the market in the event of transitory exchange rate pressures not linked to economic fundamentals.

“The bank, however, allows the exchange rate to adjust in line with the obtaining market conditions.

“This is the stance the Reserve Bank has taken today.

“As such, the exchange rate has always been market-determined.

“This position was clearly stated in the April 2024 Monetary Policy Statement.”

The RBZ Governor said the value of ZiG is designed to reflect movements in reserve assets, such as gold, and the inflation differential between ZiG and the US dollar.

However, rising inflation had eroded those gains, despite rising gold prices.

“The underlying value of the structured currency (ZiG) is designed to mimic the movement in the prices of reserve assets backing it and the inflation differentials,” he continued.

“In this regard, as communicated in the April 2024 Monetary Policy Statement, the intervening exchange rate shall be determined by the inflation differential between ZiG and USD inflation rates and the movement in the price of the basket of precious minerals held as reserves.

“In this regard, while the gold price has been firming, suggesting appreciation of the gold price-implied exchange rate, the country has witnessed increased inflationary pressures as evidenced by month-on-month inflation of 1,4 percent in August 2024 and 5,8 percent in September 2024, thus offsetting the firming gold price.

“This has, therefore, underscored the need for a price discovery mechanism to align the exchange rate with the

macroeconomic dynamics underpinning the structured currency.

“The movement in the exchange rate is expected to play a critical shock-absorbing impact on the prevailing excess liquidity in the economy, which helps anchor inflation expectations and minimise the inflation differentials going forward.”

The recent injection of approximately US$110 million into the market by the central bank, he said, had helped sustain the current level of economic activity.

“The cumulative foreign currency injections by the Reserve Bank have greatly assisted in clearing the foreign currency pipeline demand that had accumulated at banks due to supply demand mismatches.

“This was important to ensure seamless financing of critical imports into the country at a time when foreign currency availability was constrained,” added Dr Mushayavanhu.

“Accordingly, the interventions have gone a long way to sustain the current level of economic activity in the country as indicated by the continued availability of goods in a drought year induced by the El Niño weather conditions.”

ZiG, introduced in April 2024, is anchored by the value of precious minerals, primarily gold, and foreign currency reserves held by the RBZ.

The reserves backing ZiG presently stand at around US$380 million.