IMF warns against state interference on the forex market

Harare – The International Monetary Fund (IMF) has said that policy slippages or interference by vested interests could impede ongoing efforts to have market-determined exchange and interest rates.

Highlighting on the macroeconomic outlook and risks in its latest Staff Monitored Program (SMP) update on Zimbabwe released on Friday, IMF said the currency reform introduced in February is an important step forward, but there is substantial uncertainty as to how economic activity and prices will adjust to the new policy regime with a market-determined exchange rate, improved access to FX, and tight monetary and fiscal policy.

“For the banking sector, the impact of currency liberalization and projected slowdown in economic activity could impair balance sheets. The reduction in support to SOEs and their privatization could also cause disruptions and lead to higher-than-expected price increases,” IMF said.

The central bank authorities in February 2019 moved in to liberalise the exchange rate effectively abandoning the 1:1 exchange through establishment of an interbank foreign exchange market so as to bring sanity in the foreign currency market and stabilise prices of goods and commodities.

However, concerns were raised against the government’s decision to peg the exchange rate at 1:2.5 which it justified as a starting rate when rates on the parallel market by that time were trading above 1:3,5.

Government has since not fully let go off its grip on the market and although it recently scrapped subsidy on fuel imports which existed even after the introduction of interbank market, it still holds influence over pricing which raises concern that the policy measures cannot be fully realised.

Following the scrapping of the fuel subsidy, the value of the RTGS$ further plummeted on both markets, reaching a high of 1:7.5 on the parallel market whilst crossing the 1:5 exchange rate on the interbank market.

Government has since maintained that the policy measures will bear fruit in the medium to long term and has said that inflation which is currently spiralling upwards will begin to fall towards the end of the year.

Equity Axis News

Raynold M

Raynold Mhotseka is a Journalism and Media Studies student at the University of Zimbabwe. He serves as a news writer at financial research firm, Equity Axis where he is currently on attachment.

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