Zimbabwe Urged to Abandon Command Exchange Rate for Currency Stability

Zimbabwe’s government is urged to abandon the rigid ‘command’ exchange rate for the Zimbabwe Gold (ZiG) currency due to its detrimental effects on business viability. Retailers cite unsustainable practices stemming from compliance with official rates as they face significant currency distortions and price adjustments. Economists call for the Reserve Bank to allow the ZiG to float freely, highlighting a disconnect between the currency and gold valuations. Calls for constructive dialogue between the government and retailers are emphasized as the economic crisis deepens.

The government of Zimbabwe is encountering mounting pressure to discontinue its ‘command’ exchange rate policy for the newly introduced Zimbabwe Gold (ZiG) currency, which was established earlier this year in April. Businesses within the country are expressing considerable difficulty in adhering to the artificial official rate, necessitating adjustments in their pricing strategies that threaten their operational viability. Retailers have reported that the enforced official exchange rate is leading to unsustainable business conditions, compelling them to adopt adjusted pricing in the ZiG to mitigate ongoing losses, particularly as the local currency experiences significant depreciation in the parallel market. Economist Gift Mugano has publicly condemned the current monetary policy, advocating for the Reserve Bank of Zimbabwe (RBZ) to permit the ZiG to float freely. He articulated, ‘The central bank must liberalize the exchange rate. We are in the midst of a storm, and while the right policies must be implemented, the necessary groundwork to make this work wasn’t laid before the ZiG was launched.’ In a bid to control the situation, RBZ Governor John Mushayavanhu has initiated measures against supermarkets that contravene government regulations related to the exchange rate, which included threats to revoke licenses for non-compliant businesses. Despite these interventions, distortions in currency valuation have remained pervasive, with the ZiG trading at significantly higher rates on the parallel market than those reflected by the official interbank rate. Economists and business leaders have raised alarms regarding the dire implications of current market conditions. Vince Museve articulated that the value of the ZiG is increasingly detaching from its intended linkage to gold prices, instead becoming captive to market perceptions and consumer confidence. “This market is mainly informal and not influenced by RBZ policies,” he stated. Retailers have echoed similar concerns, noting a widening gap between formal and informal market operations. The Retailers Association of Zimbabwe highlighted that suppliers are creating dual price lists, one for the local currency and another for foreign currency, resulting from shortages of foreign currency and severe fluctuations in the ZiG’s exchange rate. “This situation is unsustainable,” the association emphasized, noting that rising prices denominated in US dollars are fuelling inflation and pushing consumers towards informal market avenues. Denford Mutashu, president of the Confederation of Zimbabwe Retailers, has called for a constructive dialogue between government officials and the business community to collaboratively tackle the ongoing crisis. Despite the government’s attempts to stabilize the situation by injecting over US$100 million into the market, the ZiG was trading between ZiG35 and ZiG40 per US dollar on the alternative market recently, while the official interbank rate remained at ZiG13.98. Analysts express concern that this widening discrepancy may further exacerbate economic instability and encourage rent-seeking behaviors among market participants.

The stance of the Zimbabwean government in maintaining a fixed exchange rate for the ZiG currency has led to significant disparities between official rates and parallel market rates. This situation poses substantial challenges to businesses reliant on stable currency values, prompting concerns regarding the long-term sustainability of the command exchange rate. Economic experts suggest that the RBZ must devise more flexible approaches to monetary policy, particularly in the absence of foundational conditions that would support the introduction of such a currency. The dual pricing system adopted by suppliers illustrates the prevailing volatility in currency exchange, driven by external market forces rather than governmental interventions.

In summary, the increasing pressure on the Zimbabwean government to abandon its ‘command’ exchange rate for the ZiG is rooted in the unsustainability of enforced pricing structures amid rampant currency distortions. Leading economists advocate for a more liberalized exchange rate regime to stabilize the economy, whereas the disparity between formal and informal market operations continues to widen. There is an urgent need for dialogue between the government and business leaders to fabricate sensible strategies to confront these economic challenges effectively.

Original Source: bulawayo24.com