‘US$400m Afreximbank kitty to stabilise exchange rate’

NDAMU SANDU IN ACCRA, GHANA

Reserve Bank of Zimbabwe (RBZ) governor John Mangudya has said the US$400m facility from Afreximbank would help buttress the government measures in stabilising the exchange rate which has been volatile over the past month.

Zimbabwe has seen a sharp depreciation of the local currency which has fuelled a spike in prices with annual inflation bucking the trend last month, rising to 86.5% from 75.2% in April.

Mangudya said on Tuesday that Zimbabwe would start the drawdown on the Afreximbank kitty which comes as exchange rates have been stable over the past week.

The dollar has been stable on the official market at ZWL$6,926.57 from ZWL$6351.55 last week. Rates on the parallel market are between ZWL$8,000 and ZWL$9,000.

Mangudya said exchange rate stability would be achieved through “ensuring that the amount of money in the economy, the local currency and foreign currency stabilise” by addressing the supply and demand sides of foreign currency.

“We are happy that the facility that Afreximbank is granting Zimbabwe will buttress the measures that we have put in place. It increases the supply side of foreign currency as we continue with the tight monetary policy, tight fiscal policy,” Mangudya said.

“The foreign currency is coming in handy and timeously to bridge the requirements of the economy.”

He said the government expects the exchange rate to stabilise when it starts collecting taxes and fees in local currency. The measure, Mangudya said, increases the demand for local currency.

“It means that we are going to see companies selling foreign currency. It increases the money on the interbank,” he said.

He said the wholesale auction system has been working “very well” to the extent that rates have been stable between ZWL$6,200 and ZWL$7,200.

“This is what the banks are able to purchase at the wholesale system and are able to sell to customers. Anything above that is a constraint on the bank because they do not have local currency which is now in short supply,” Mangudya said.

The wholesale auction system was introduced two weeks ago when the central bank began selling forex at the market-determined exchange rate through banks as it moves to strengthen the foreign exchange interbank market.

The central bank has also introduced gold coins and gold-backed digital tokens to give the public assets to invest in and store value as the local currency is being pushed out by the greenback.

“In a dual currency system, the tendency is for people to look for foreign currency as a store of value. So we have given the public a choice in investing in gold because we know it is about looking for a store of value. It’s about giving them gold as a store of value. That is why internationally gold is foreign currency reserves. More than ZWL$60bn has been used to purchase gold coins, gold backed tokens,” Mangudya said.

The central bank chief admitted the dual currency regime was giving the government a nightmare as there is a “preference to hold on to hard currency as opposed to local currency” stemming from past experiences of the hyperinflationary environment and the 2019 development in which the government removed the 1:1 exchange rate that prevailed between the dollar and the bond note.

“What we now want to demonstrate is that things of the past are things of the past. Let bygones be bygones. We need confidence, we need to bring trust to ensure that the credibility of our policies demonstrate where we are going,” he said.

However, the challenges of the dual currency regime will not force the government to opt for a single currency, Mangudya said, despite evidence showing that it “is not competitive and sustainable to have a dual currency”.

“We don’t produce foreign currency in Zimbabwe. We need to export and from the diaspora to bring foreign currency into the economy. The amount that is coming in is sufficient for everyone to use, both as a local currency and as foreign currency.  We can only go to the next stage when the fundamentals are strong enough. We need to ensure that we continue with the surplus on the balance of payment. We need to continue our domestic production of goods and services,” he said, adding the strength of any economy “is about production,” he said.

The central bank chief said Zimbabwe requires it to continue having stable financial institutions and a “fallback position” in terms of foreign currency resources.

“Once you have access to foreign finance and your domestic policies are strong enough, that is possible to cross over into the mono currency. We are in the building blocks towards that but it is not a case of overnight. We need to be gradual in our approach where we ensure that the fundamentals are correct. To rush into such a policy measure is dangerous to the economy,” Mangudya said.