THE Reserve Bank of Zimbabwe (RBZ) eventually buckled under pressure and devalued the Zimbabwe Gold (ZiG) on Friday in a last-ditch attempt to save the local currency which is following the footsteps of its predecessor — Zimdollar — to the grave.
The five-month-old ZiG has been stuttering in the past two months with monetary authorities at sea on how to rescue the gold-backed currency, Zimbabwe’s sixth attempt to establish a stable unit in 15 years.
Friday’s devaluation and a raft of measures, which followed a meeting of the bank’s Monetary Policy Committee, come on the back of a series of meetings between business and government with the former complaining of a two-tier pricing regime which was choking their operations.
When companies fail to get the cheaper United States dollar on the formal markets, they are forced to procure it on the parallel market to sustain operations, resulting in a spiral of prices to cover the cost.
The overvalued exchange rate had resulted in customers offloading their local currency balances at retailers. Retailers have been complaining of reduced dollar revenue which was making it difficult to restock as manufacturers were selling in foreign currency or in ZiG at a rate higher than the willing buyer willing seller rate.
It was clear that ZiG was weakening against the United States dollar with premiums rising by more than half amid fears the controlled exchange rate would fuel rent-seeking behaviour by the elite.
RBZ could not act, blaming speculators for the sharp depreciation of ZiG and claiming to have pumped over US$100 million into the interbank market in two months amid a build up in pipeline demand. Such an injection appeared to be a drop in an ocean as the premiums continued on an upward trend.
The central bank should have allowed ZiG to float to find its real price and the pain would not have been as severe as the one that will follow Friday's announcement.
The central bank's Monetary Policy Committee resolved to allow greater exchange rate stability in line with increased demand, an admission that it was using a command exchange rate policy.
It also raised the bank policy rate to 35% from 20%. The move may have been motivated by the belief that there is speculative borrowing which is piling pressure on the new currency.
RBZ also reduced the amount of foreign currency one takes outside the country to US$2 000 from US$10 000.
The statutory reserves were increased and standardised for demand and call deposits for both local and foreign currencies at 30%.
The statutory reserve requirements for savings and time deposits for both local and foreign currency were increased to 15% from 5%.
Will these measures stabilise the local currency? We believe they are too little too late as confidence in the currency has reached a new low.
We do not foresee RBZ dumping its command exchange rate policy. It will continue blaming speculators for the depreciation of ZiG.
The more bureaucrats at Munhumutapa building continue pontificating about a return to the monocurrency regime with ZiG as the sole legal tender, the more the structured currency will depreciate.