Dr Matshe defends RBZ amid rising outcry over exchange rate

LIVINGSTONE MARUFU

Reserve Bank of Zimbabwe (RBZ) deputy governor, Dr Innocent Matshe, has moved to quash growing criticism that the apex bank is manipulating the foreign exchange market, insisting that the willing-buyer willing-seller (WBWS) system is functioning in line with international floating models.

“It is absolutely untrue that we control the exchange rate. If the WBWS exchange rate is being managed by the RBZ, why is the parallel market rate not rising? Because then the parallel market will take advantage of the misalignment,” Dr Matshe told Business Times.

He added: “The trends in WBWS exchange rates indicate normal pattern for exchange movements observed in other jurisdictions with floating exchange rate systems—a random walk pattern. The observed trend is also evidence that the exchange rate is floating and not fixed and there is no RBZ interference. These are market determined exchange rates.”

Matshe further argued that the exchange rate had shown genuine market-driven fluctuations. “The exchange rates have been oscillating in both directions (depreciation and appreciation) indicating the interplay of market forces. The current trend shows that there is no uniform pattern of spreads suggesting free market activity by the banks to determine their own exchange rates.”

According to him, movements between ZWG26 and ZWG30 against the US dollar are evidence of a liberalised system.

Despite Matshe’s defence, several business leaders and economists maintain that the RBZ is managing the exchange rate, which they say undermines trust and creates distortions.

The Zimbabwe National Chamber of Commerce (ZNCC) said in its position paper that formal businesses have been penalised by the current system through market distortions, supply disruptions and policy uncertainty.

“The market perceives the interbank market [WBWS] as largely controlled by the RBZ despite repeated assurances of a liberalised foreign exchange market. What makes the interbank market and the exchange rate determination function crippled is the absence of voluntary suppliers (sellers) of the foreign currency outside the apex bank itself,” the ZNCC said.

It added: “Future policy shifts must be preceded by deep stakeholder consultation. The Parliament must expedite the repeal of the Exchange Control Act in line with the new SI to cement liberalisation reforms. Rebuilding trust is a prerequisite for currency confidence.”

Private sector players with excess foreign currency are shunning official channels and opting for the parallel market, where rates are far higher than those offered formally.

“Consequently, the supply of foreign currency in the interbank market is limited, and the RBZ remains the major supplier through proceeds from the surrender requirements, which are insufficient to meet the burgeoning demand,” ZNCC said.

“The disparity between the official and parallel market rates drives foreign currency transactions outside formal banking channels, reducing liquidity in the interbank system. Enhanced monitoring by financial authorities has led to suppressed activity in larger transactions on the parallel market, but smaller transactions continue unabated.”

CEO Africa Roundtable chairman, Oswell Binha, said business confidence is being undermined by what he described as “sub-optimal” stability.

“We believe that the exchange rate is managed. This only perpetuates arbitrage and speculative tendencies,” Binha said.

Economists also lined up to argue that the exchange rate is not genuinely market-determined.

Economist Eddie Cross said: “The exchange rate is still being managed in the sense that the Reserve Bank does not allow the official exchange rate to vary. It’s still set at ZWG27 to US$1. However, what the Reserve Bank has done is to allow the retail sector to fix an exchange rate which reflects real market levels. And this seems to be working in the sense that it allows people to use ZIG at an exchange rate which is not very different from the official one.”

Cross noted that in the formal sector, the exchange rate sits around ZWG32–34 to the US dollar, while in the informal sector it can be as high as ZWG42:US$1. “It’s difficult to understand exactly why this is the case. But the stability emanates from the fact that the Reserve Bank is, in fact, managing the availability of ZIG and is not allowing the printing of ZIG on an uncontrolled basis. So ZIG is being limited in availability by the Reserve Bank, which means in effect that we remain almost fully dollarised.”

Cross added that the RBZ’s policy of taking 30% of export proceeds and converting them at the official rate effectively devalues export earnings, undermines competitiveness, and disincentivises exporters.

“I still think that the only way forward, if they are truly going to de-dollarise, is in fact to make the ZIG fully liberalised and allow the market to set the rate and for the Reserve Bank itself to function at that level,” he said.

Another veteran economist, Professor Tony Hawkins, argued that the apparent stability of the ZiG exchange rate is cosmetic.

“In any normal foreign markets rates move up and down in response to economic and political influences, but the ZiG is stable because its use is restricted and because it is only available in virtual form. Actual ZiG currency is a tiny proportion of the total money supply. In this sense exchange rate stability exists only in the realm of ruling party politicians and RBZ officials. If you want to discover how stable the rate is you need to abolish foreign exchange market controls which this government will not do,” Hawkins said.

Another economist, Dr Prosper Chitambara, said the International Monetary Fund (IMF) has also observed that Zimbabwe’s exchange rate system is managed, not liberalised.

“No, it’s not fully liberalised, I think it’s a managed system, and the International Monetary Fund has also made that observation and encouraged greater flexibility in the system, so it’s a managed system,” Dr Chitambara said.

He attributed the relative stability to a liquidity squeeze caused by tight monetary and fiscal policies. “In other words, contributing to the stability is the tight liquid situation in the market in the economy. The monetary policy has been tightened, but also the fiscal policy, it’s a fairly conservative fiscal policy, so there is actually a tight liquid situation which has contributed to the stability that we are witnessing.”

For economist Malone Gwadu, Zimbabwe’s exchange rate system is a hybrid.

“The exchange rate in my view is a hybrid of liberal and managed in the sense that market is determining exchange rate through bidding with ADLAs on the auction and it’s largely in specific ranges but however it is being managed by ensuring very limited liquidity in the market and by derivation reducing full expression of market bidding of the currency due to controlled liquidity which limits ability to exchange,” Gwadu said.

He noted that the parallel market had been “crippled” by contractionary monetary policy—high interest rates, statutory reserves and prohibitions on quasi-fiscal operations—which had starved the system of liquidity.

“Therefore there is simply no parallel market liquidity that is able to move exchange rate significantly. Which is a key milestone for the central bank as parallel market was previously a serious systematic threat to business as it eroded value,” Gwadu said.

Despite the barrage of criticism, Matshe insists the RBZ is allowing the market to determine the exchange rate and is not interfering.

“The observed trend is evidence that the exchange rate is floating and not fixed. These are market-determined exchange rates,” Matshe maintained.

For now, the divide between the RBZ’s assurances and the scepticism of business leaders and economists underscores the fragility of confidence in Zimbabwe’s currency reforms.