- USD/ZWL$ exchange rate breaches 1:25 on the parallel market
- RBZ said the issue is now up for investigation
- Wildly currency fluctuation create economic uncertainty and instability, affecting capital flows as well as threaten a spike in inflation
- The fall in ZWL$ value was expected. Its reintroduction was mistimed and marred by uncertainty from the very beginning.
Harare – The Reserve Bank of Zimbabwe (RBZ) has claimed that the recent spike in exchange rates is a result of ‘some exchange rate manipulators that are exerting pressure on the forex market with the intention of destabilizing the stability that the country has been experiencing over the past four months.’
In a statement published on its twitter handle, the Bank said the issue is now up for investigation.
“Such malpractice is not warranted as money supply has remained under control for the past five months.
“The matter has been escalated to the Financial Intelligence Unit that is proceeding to investigate and freeze the accounts of those upsetting the market,” said the Central Bank.
Broadly, numerous fundamental and technical factors influence the exchange rate of one currency compared to another. These include relative supply and demand of the two currencies, economic performance, an outlook for inflation, interest rate differentials, capital flows, technical support and resistance levels, and so on.
As these factors are generally in a state of perpetual flux, currency values fluctuate from one moment to the next.
In the case of Zimbabwe, the local currency has been fast losing value since its abrupt introduction in June 2019. The move followed an earlier separation of local RTGS balances from US dollar balances in February 2019, then at an exchange rate of 1:2.5 between the RTGS$ and US dollar respectively and also accompanied by the introduction of the interbank market.
In those cases, the monetary authorities indicated the intention to address two key things: Exchange rate stabilisation and contain inflation rate, both of which they are failing to deliver.
The recent allegations raised by the Central Bank came at a time the exchange rate has breached the 1:25 between the ZWL$ and US Dollar on the parallel market whilst trading at a rate of about 1:17 on the interbank market.
The risk caused by the wildly currency fluctuation creates economic uncertainty and instability, affecting capital flows as well as threaten a spike in inflation as most businesses are pegging prices to the US dollar value.
Before we focus on the RBZ reaction to the exchange rate movements, it can be admitted that the developments are not in any way a surprise. The fall in ZWL$ value was expected. Its reintroduction was mistimed and marred by uncertainty from the very beginning.
Ironically, the Zimbabwean dollar was reintroduced under circumstances highly comparable to when it was abandoned in 2009 after years of economic upheaval, currency devaluation and devastating hyperinflation.
Analysts cautioned that the absence of key economic fundamentals to support the reintroduction of the local currency spell a doom for its future value.
However, the Central Bank has its own theories. The authorities have enacted several monetary policy measures in a desperate bid to strengthen the local currency as well as manage inflation. The Central Bank has kept the overnight lending rate at 35% since 20 November 2019, said they are carefully managing injection of new notes and coins into the system and are yet to introduce larger denominations of currency into circulation.
In September last year, the Central Bank froze accounts belonging to Sakunda, Access Finance, Spartan Security, Croco Motors and other related companies under allegations that they were responsible for manipulating exchange rates by feeding the parallel market.
At that time the exchange rate had spiked to as high as 1:30 on the parallel market.
Likewise, two local banks Ecobank and CBZ were put under investigation following images of cash supposedly from the banks was alleged to have been channelled into the parallel market soon after the introduction of new $2, $5 notes and the $2 bond coins. The Central Bank is yet to release its findings in those cases while word on the street is that the alleged criminals have been put off the hook.
On the recent development, RBZ did not mention the alleged manipulators.
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