Exchange rates converge as government policy measures take hold

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the herald

business journalist

Economic analysts see official and black market exchange rates converging soon after premiums have fallen significantly since the Reserve Bank of Zimbabwe (RBZ) and revenue authorities introduced policy measures to stabilize the rate exchange rates and control galloping inflation.

Inflation and the exchange rate have remained largely stable since the government stepped up interventions to extract excess liquidity from the market, with the local currency appreciating against the US dollar on the black market as inflation slowed. Some of the measures included the introduction of gold coins as a store of value and alternative to the US dollar and a review of all government supply contracts priced using parallel market exchange rates, which helped to the creation of excess liquidity.

The central bank also raised the key bank rate, which determines minimum bank lending rates, from 80 percent to 200 percent to discourage speculative borrowing to engage in illegal currency trading and exploit arbitrage opportunities. in the stock market.

The foreign exchange premium has fallen significantly from 140% in May 2022 to between 5% and 15%, central bank governor and Monetary Policy Committee Chairman Dr John Mangudya said on Tuesday.

Dr Mangudya said the spread between the interbank rate, which stood at $621.6 against the greenback yesterday, and the black market rate, trading between $700 and $750, has narrowed significantly, “which is in accordance with regional and international standards”.

“We are heading towards convergence or near-convergence and that should provide price and exchange rate stability and maintain the value of the currency,” Carlos Tadya, an economist based in Harare, told the Herald Finance & Business.

Dr Mangudya said that “this positive development on the exchange rate front should go a long way in eliminating arbitrage opportunities, which were fueling forward pricing models; thus fomenting adverse inflation and interest rate expectations. change.

The appreciation of the local currency against the US dollar has led to greater acceptance of the Zimbabwean dollar. “The situation has turned around; you can’t just imagine that about two months ago we didn’t accept Zimbabwean dollars or in some cases we did, the prices were ridiculous because we were using forecast cost models,” said Juliet Ngena, owner of a grocery store in Harare’s central business district.

The stable exchange rate has also led to lower prices for some commodities.

From manufacturers to wholesalers to retailers, inventories piled up due to weak demand as most products had been priced using forward costing models.

In a rising inflation environment, most companies used forward pricing models to hedge against local unit depreciation.

With the economic stability currently prevailing, as evidenced by the falling monthly inflation rate and the decline in the black market exchange rate, some manufacturers and retailers are cutting prices in an effort to empty overcrowded warehouses and boost sales. . The MPC expressed satisfaction with the positive impact of recent policy measures, which led to a significant drop in monthly inflation from 12.4% in August 2022 to 3.47% in September 2022. Month-to-month inflation has, in turn, caused annual inflation to fall to 280.4% in September 2022 from 285.1% in August.

Harare-based economist Victor Bhoroma said there must be liberalization of the foreign exchange market to allow banks to be “matchmakers” and distributors of foreign currency in the market.

“The main role of the central bank is to monitor and regulate while focusing on keeping inflation low,” Mr Bhoroma said, while “interest rates should always be in line with inflation to discourage speculative borrowing and artificial demand for foreign currency”.

The MPC kept banking policy and medium-term lending rates at 200% and 100%, respectively, “until sustained stability, as measured by a sustained decline in inflation from month to month.” other at desired levels of less than 5% is achieved.

“The RBZ should exercise utmost diligence so that currency manipulators do not resurrect and keep the money supply in the market under control,” said economic analyst Dr Langton Mabhanga. The gold coins helped to mop up excess liquidity in the market “as well as a demand agent for the Zimbabwean dollar and a speculative money deflector that could have inflated the value of the US dollar”, Mabhanga said. .

Gold coins were introduced in July this year and coins worth $9 billion have been sold so far.

Dr Mabhanga said the Treasury must continue to review all tender values ​​and “deepen value-for-money sourcing strategies” and continue to strengthen forex trading between buyers and sellers.

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