Exchange rate policy consistency remains elusive for Zimbabwe

 Exchange rate policy consistency remains elusive for Zimbabwe
Published: 23 September 2019
The issue of the exchange rate has progressively become the focal point of local economic discourse as uncertainty continues to grip the country's future. Following the accelerated depreciation in the parallel exchange rate experienced last week, Minister of Finance and Economic Development Mthuli Ncube made the unexpected decision to loosely comment on the developments.

In a communication released on his twitter page, Ncube suggested that the Zimdollar was significantly undervalued, placing it at a rate of ZWL$5.6 per USD at the end of August versus corresponding interbank rate at $10.7139. The real exchange rate figure was calculated using an implied real exchange rate adjusted for purchasing power parity relative to the rand. The move followed up earlier comments he made in an exclusive interview with FinX when he stated that the exchange rate should be between 4-5, attributing the mismatch to a risk premium.
Watch the segment on
A look at responses to Ncube's statements indicates a significantly adverse response from the public. Much of it paints the picture of an increasingly frustrated audience fast losing confidence in the governments capacity to resolve the current economic challenges. Arguably, with the public searching for answers after the sudden spike in the rates, Ncube's hypothetical statements seem out of place, particularly since they do not give any specific insight into the situation or government's strategy on correcting the apparent disparity.
Parallel to Ncube's publication, the RBZ set about its own course of action, apparently placing the blame on a group of companies and subsequently freezing their accounts for further "investigations". The Apex Bank also went on to impose more stringent regulations on Bureaux de change, introducing fixed margins for dealers and restricting the sale of cash to foreign travelers. That move in particular, contradicts with the earlier policies aimed at establishing a fully liberalized exchange market to improve accessibility.
The public response to the RBZ's actions reads the same as that to Ncube's - yielding more questions than answers. Beyond that, it calls to question the effectiveness of the RBZ's second interest rate hike aimed at easing pressure on the exchange rate if a group of companies do so regardless. Meanwhile, the subsequent retreat of the exchange rate since the announcements adds another layer of confusion about the dynamics behind the exchange rate markets and the RBZ's role in it. Observers point to the Apex Bank's possible culpability in the exchange rate spike through accelerated money supply growth which was on the rise between March and June 2019.

All this corresponds with knee jerk economic policy management, and suggests the relevant authorities lack a comprehensive and cohesive strategy. Worse still the authorities seem full aware of the growing confidence deficit, and its destabilizing impact on their policy management efforts. Yet the chief authority on monetary policy has at no point revealed a target exchange rate or detailed strategy on its management strategy, but Ncube placed a marker and did so through an informal channel with no context, rendering it meaningless.  Beyond that, the use of the local CPI Index in the derivation is questionable, considering the local misgivings about its accuracy and formulation. A situation implicitly acknowledged by Ncube himself by suspending the publication of the Annual Inflation figure.
Ultimately, it seems the authorities are caught in a continuous loop short term reactionary policies, with confidence weakening at each cycle. The public response to the recent set of events is a clear illustration of the mountain the authorities have to climb and it is growing each misstep or stop gap measure. Granted, it is a complex maze of issues in which multiple economic and social factors have to be balanced. However, with the country's economic environment increasingly unstable, there is a clear need for decisive and well thought out policy choices that get to the root of the issues. Otherwise, the economy will remain in a volatile space, susceptible to similar episodes with the same ineffective policy flip-flopping leading no where..
- finx
Tags: Zimbabwe,


Latest News

Latest Published Reports

Latest jobs