LIVINGSTONE MARUFU
Zimbabwe will set aside US$500m from the Special Drawing Rights (SDRs) to shore up the local currency which has taken a battering against the dollar fuelling a sharp increase in the prices of goods and services.
The Zimbabwe dollar has plunged in the past few weeks. This week, it was trading at ZWL$98: US$1 at the auction system from ZWL$83:US$1 two weeks ago.
On the parallel market, the beleaguered local currency is trading at ZWL$185 to the greenback from ZWL$130:US$1 two weeks ago.
Alena Douhan, United Nations Special Rapporteur, who was in Zimbabwe to assess the impact of sanctions, said the Reserve Bank of Zimbabwe governor John Magudya told her that the Central Bank would use part of US$961m it got from the International Monetary Fund to stabilise the local unit. The envoy met Reserve Bank of Zimbabwe (RBZ) governor John Mangudya, among a number of key players.
“In August 2021, the IMF allocated US$961m in special drawing rights, of which US$500m will be used to support its currency and the rest for Zimbabwe’s Covid-19 response. No funds will be used to alleviate its debt,” the UN Special Rapporteur ssaid.
Mangudya told Business Times that the US$500m will go a long way in stabilising the exchange rate.
“As we have said before, the majority of the money [US$500m] will help to increase the foreign exchange reserves position and buttress the stability of our domestic currency,” Mangudya said.
“The balance will be for Covid-19 response and support the social sectors such as health, education and the vulnerable groups together with the productive sectors that include industry, agriculture and mining. But over and above everything the fund will support our domestic currency and macro-economic stability.”
The local currency has been taking a rout on the parallel market on the back of increased demand as the Central Bank struggles to release the money allotted at the foreign currency auction system.
Mangudya said another option would be the utilisation of the existing letters of credit facilities for the importation of strategic commodities and capital goods in order to lessen the demand on the auction system.
The Central Bank, the government and the business community convened in October to stop the volatile exchange rate which has topped ZWL$200: US$1 on the parallel market. The exchange rate has somehow stabilised to around ZWL$180:US$1.
The Central Bank’s Monetary Policy Committee (MPC) recently hiked the bank policy rate by 20 percentage points to 60% to curb speculative borrowings suspected of fuelling parallel market trades.
The MPC also increased the minimum deposit rates for ZWL$ savings and time deposits to 7.5% and 20% per annum from 5% and 10% respectively, with a view to promoting the appeal of the ZWL$ as an investment currency.
Mangudya said the bank will further tighten the reserve money by reducing the quarterly growth in reserve money to 10% from 20% for the fourth quarter and first two quarters of 2022.
RBZ has also refined the forex auction system to strengthen its effectiveness as a forex price discovery platform by limiting allotments to the forex available at the time of the weekly auction and paying same within two weeks from the date of auction.
However, Douhan, the UN Special Rapporteur, said the debt and subdued productivity levels have worsened the Southern African country’s challenges.
The IMF classifies Zimbabwe “in debt distress” with large and longstanding arrears to international financial institutions and commercial creditors. By the end of 2018, Zimbabwe had accumulated more than US$8bn in foreign debt and about ZWL$6.9bn in domestic debt.
“It is reported that since 2001, Zimbabwe might have lost access to more than US$100bn in bilateral donor support, international commercial loans, and grants and loans from the IMF, the World Bank and the African Development Bank.
“Due to this, Zimbabwe had a reported US$34bn funding gap in infrastructure financing in 2017. The inability to generate additional revenue and the country’s poor economic performance has limited the government’s ability to provide basic social services,” Douhan said.
