The exchange rate gap is widening, but Mangudya says acting on it is ‘chasing one’s tail’

currency Zimbabwe
ZImbabwe's struggle for currency stability continues (REUTERS/Philimon Bulawayo)

Reserve Bank of Zimbabwe Governor, John Mangudya, is reluctant to act to narrow a widening gap between the Zimbabwe dollar’s official and black market rates, saying that businesses are to blame for the disparity.

While the Zimbabwe dollar has been allowed to gradually weaken from parity with the US dollar in February 2019 to around 112.8 to the US dollar, it trades at over 200 to the dollar on the black market, stoking inflation.

Business leaders have blamed the disparity on a lack of foreign currency supply, but Mangudya says it is due to many businesses accepting payment in US dollars at the unofficial, or parallel market, rate.

“We would love convergence, but it requires the business community to also walk the talk,” he said Monday in an interview with Bloomberg. “Convergence must be at a realistic exchange rate.”

The weekly foreign currency auction run by the central bank resumed Tuesday after a more than month-long gap over the Christmas holidays.

“Delays only help in promoting the parallel market as a source of US dollars,” the oldest brokerage in the country, Imara Asset Management, said in a note to clients this week.

Currency crisis

Business has said it is at the receiving end of the currency rate disparity. It struggles to obtain the foreign currency which it needs to keep operations running and is forced to turn to the parallel market.

The Confederation of Zimbabwe Industries, the largest business lobby group in the country, in October warned a policy response from authorities was needed to save the local unit from collapse.

“Such a gap plays havoc” for companies, John Legat, the chief executive officer of Imara, said.

To have the official rate move to match the parallel market rate is “like chasing one’s tail,” according to Mangudya. The unofficial rate will only surge even higher, decimate the earnings of citizens and lead to price hikes in the southern African nation, where annual inflation was 61% in December,” he said.

“People just want to hold US dollars,” said Mangudya.