Zim dollar plunges 66 percent on interbank market

Zim dollar plunges 66 percent on interbank market

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By MacDonald Dzirutwe

ZIMBABWE'S dollar plunged 66 percent on the newly-launched interbank market on Tuesday, a tumble which will push up inflation but should permit a desperately needed rise in exports.

Analysts had expected the currency to weaken quickly under the new system, which officially started last Friday.

There had been no trade until now as banks said they were still awaiting more central bank clarification on how the market would function. However, a small number of banks began trading on Tuesday.

The Zimbabwe dollar was quoted at around 76,029 to the dollar at noon against 26,004 at recent Reserve Bank of Zimbabwe (RBZ) managed auctions -- closer to the 90,000 rate offered on a thriving black market.

Zimbabwe has suffered chronic foreign currency shortages over the last 6 years, one of the most visible signs of its worst economic crisis since independence from Britain 25 years ago.

The RBZ last week announced initial steps towards a managed floating exchange rate system which would determine the exchange rate for the local dollar, although exporters still have to remit 30 percent of their earnings at the official auction rate.

A selection of commercial banks contacted by Reuters were quoting the Zimbabwe currency in a 60,000 to 78,305 range on Tuesday, with the central bank pegging the average at 76,029.

"There is still a bit of caution in the market because there are a number outstanding issues which we need to clarify with the Reserve Bank," a dealer at a Harare bank told Reuters, without giving details.

Under the new system, local banks are required to sell all excess funds daily to the central bank at the new average market rate, whose calculation dealers said remained hazy.

Analysts said the cautious stance taken by most banks could signal low confidence in the system, but added this should improve if there is no interference from authorities.

The analysts said the local unit would trade at no more than 84,000 to the greenback in the short-term, gradually weakening in the long-run, which would lift exports and stabilise the battered Zimbabwe dollar in the longer term.

"There is no confidence yet in the system but if market forces are left to determine the exchange rate this will trigger exporters to produce and thereby improve official inflows," Witness Chinyama, chief economist at Kingdom Bank, told Reuters.

"Initially the weakening currency will be inflationary but as inflows improve this will stabilise the exchange rate and inflation."

But dealers said black market activity would continue since official avenues would not meet the higher appetite for imports - Reuters
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