Govt switches to managed float forex regime in latest tinker

Finance Minister Mthuli Ncube raised the money transfer tax to widen government's revenue base

Zimbabwe will adopt a “managed float” exchange rate regime, Finance Minister Mthuli Ncube said on Wednesday, abandoning strict control of foreign exchange by the central bank in the latest in a series of currency reforms that have so far failed.

The country, which has seen bouts of hyperinflation since 2008, has taken steps to ease its heavy reliance on the U.S. dollar, part of a raft of economic reforms by President Emmerson Mnangagwa, who replaced longtime leader Robert Mugabe after an army coup in 2017.

Zimbabwe reintroduced its own currency last June, ending a decade of dollarisation, but the currency has struggled to hold its own as inflation vaulted again.

The central bank has controlled the interbank forex trading market, which was introduced in February 2019.

The latest move will see banks take a bigger role in foreign currency trades, narrowing the gap with the unofficial market by allowing trade on a more transparent platform.

On Wednesday, the Zimbabwe dollar was trading at 18.26 against the U.S. dollar on the official interbank market and at around 40 to the greenback on the black market.

“Zimbabwe has had no transparent and effective foreign exchange trading platform for a long time. Consequently, official rates have not been effectively determined, while a thriving parallel market has developed,” Finance Minister Ncube told reporters in Harare.

He said an electronic forex trading platform was being put in place immediately.

“This platform will allow foreign exchange to be traded freely among banks and permit a true market exchange rate to be determined.”

Economic analyst Batanai Matsika of securities firm Morgan & Co described the policy shift as a desperate measure.

“This demonstrates the desperation of the authorities to deal with the widening gap between the official and parallel market exchange rates,” Matsika said.

“But it does not address the fundamental issue, which is the supply of forex. In a managed float, you need reserves to intervene in the market. The government does not have that. We do not even have three months’ import cover.”

Economic commentator Brains Muchemwa said the latest policy might not succeed in stabilising the exchange rate if the government did not maintain fiscal discipline.

Ncube insisted that the government had managed to control its spending and had a fiscal surplus of 3.1 billion Zimbabwean dollars ($172 million) at the end of February.

Last month the International Monetary Fund (IMF) warned that delays by Zimbabwe in implementing foreign exchange and monetary reforms risked undermining the new currency and the government’s reengagement internationally on debt arrears.

On Wednesday, Ncube also announced a new taskforce, which he will chair, to implement policy reforms aimed at stabilising the exchange rate and curbing inflation, which reached 521% at the end of 2019, according to the IMF. – With Reuters