RBZ adopts market-based exchange rate

THE Reserve Bank of Zimbabwe (RBZ) has adopted a market-determined system for setting exchange rates, with the auction system being replaced by a refined interbank foreign exchange market which connects and allows trading between willing-buyers and willing sellers.

The central bank itself will help feed the market with the 25 percent surrender export earnings. 

There was now adequate foreign currency reserves to cover all import requirements, so legitimate businesses did not have to turn to the black market.

Businesses and economists had often in the past called for the Reserve Bank to fully liberalise the foreign exchange market to allow the rate to be determined by market forces. 

Since the end of last year, the RBZ has not been holding auctions, and banks have thus been setting the exchange rate through their own dealings. 

The central bank now considers the system permanent.

The interbank rate is the weighted average of the dealings of commercial banks, with each bank having its own rates to buy and sell foreign currency.

The International Monetary Fund (IMF) early this year also encouraged the Government to accelerate the reform of the foreign exchange market by promoting a more transparent and market-driven price discovery in the official exchange rate and by removing existing exchange-rate restrictions and distortions.

Presenting the 2024 Monetary Policy Statement in Harare yesterday, Reserve Bank Governor Dr John Mushayavanhu, said a transparent price discovery mechanism was now in place in the interbank market and the bank would continue to provide trading liquidity to the market using the 25 percent surrender proceeds from exports.

The new central bank chief was not worried about the black market, saying he had enough tools and reserves to back the new currency, challenging those sworn to operating in the black market and fuelling exchange rate volatility to dare and see if they could hurt the new domestic unit of transacting.

Dr Mushayavanhu said there was no need for genuine business operators with genuine foreign payment invoices to seek foreign exchange on the black market, as he had enough in reserves to meet obligations. 

Going by the current total reserve money in circulation of Z$2,6 trillion, the equivalent of US$80 million, the RBZ boss said he had enough foreign currency reserves to meet external invoices while his total reserve currency war chest guaranteed three times cover.

“Following the introduction of a refined interbank foreign exchange market under the willing-buyer willing-seller trading arrangement, all outstanding auction allotments will be converted into ZiG and issued out as non-interest-bearing non-negotiable certificates of deposits at the current interbank exchange rate, with a maturity of 24 months at an interest rate of 7,5 percent per annum.

“This process will allow the beneficiaries to maintain the value of their proceeds under the new framework,” he said.

The last trading on the RBZ auction was conducted in November last year, with market sentiments adopting the view that the central bank had fully liberalised the foreign exchange market to allow the rate to be determined by market forces as the fall in value of the local currency continued.

“You would have noticed that from January 2024, the central bank has allowed the exchange rate to be determined by market forces. And we have been watching because that is what you (businesses) have asked for in the past, and we say there you have it, the rate is floating,” he said.

Dr Mushayavanhu also said all outstanding payments for foreign exchange purchased by Treasury under the 25 percent surrender requirement will be converted to a ZiG-denominated instrument with a tenure of one year at an interest rate of 7,5 percent per annum.

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