RBZ’s latest currency scramble: A rate hike, curtains for forex auction, and yet another policy backflip

Central bank has raised interest rates and shelved the auction as the main forex market, as a reversal of week-old policy measure shows how authorities are struggling to get a handle on the currency crisis.

The bank’s key lending rate is up 10 percentage points to 150%, its level before the March 30 rate cut to 140%.

The foreign currency auction, introduced in 2020 to determine the exchange rate, will now be replaced as the “primary source of forex” by the interbank market, RBZ’s monetary policy committee (MPC) said in a statement on Tuesday. Banks will now sell forex to clients.

“With effect from 7 June 2023, the Bank shall sell foreign currency at the market-determined exchange rate through banks to support and strengthen the foreign exchange interbank market, and banks shall in turn sell the foreign currency to their customers,” the MPC said.

“This measure is calculated to ensure that the interbank forex market is the primary source for foreign exchange needs in the economy and that the foreign exchange auction system shall continue to operate for meeting smaller requirements for foreign payments and for continuous price discovery.”

Authorities are battling to gain control of the exchange market, where the Zimbabwe dollar has collapsed over recent weeks on both the formal and informal markets. This has fuelled sharp price increases, drawing claims of “political sabotage” from a government that has an eye on elections in August.

A sign of the scramble for a solution is how policy has shifted back and forth over recent weeks.

On May 29, Finance Minister Mthuli Ncube announced that exporters must also now use their export earnings within 90 days or have them sold at the formal forex market. This was a policy switch back to a measure that was removed only two years ago when industries said this was hurting them. Now, there is yet another policy backflip.

According to the MPC, “in order to ensure that the interbank forex market is self-financing the 90-day liquidation requirement on export proceeds will fall away”.

What happens to the auction now? It will now handle only smaller amounts, with a limit of US$5 million per week. Bid limits are now a minimum of US$1 500 and a maximum of US$50 000.

Economist Persistence Gwanyanya, a member of the MPC, said shifting away from the auction is a move to “a more market determined exchange rate policy”. RBZ would set a daily “floor price” for the market, he said, without details. 

On Tuesday, the Zimdollar traded at Z$3,673 at the auction. This is a steel drop from the Z$928 at the end of the first quarter, yet still far lower than rates on the more widely used parallel market.

RBZ governor John Mangudya has ruled out ditching the Zimdollar completely, saying Zimbabwe does not have enough dollars in circulation to sustain dollarisation. While exports have grown, reaching over US$11 billion last year, the economy still cannot pay for critical imports and has no capacity to run on USD.

“It (export revenue) belongs to the exporters so that they can export more. Now people are always confused that this US$11 billion is ours, no it’s not ours,” Mangudya told a meeting of miners.

“Ours is 25% (from export retention) which is supposed to go through the rest of the economy. That’s what we use for the auction, for reserves and for paying debts. That’s what it is,” he added.

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