By Bloomberg News
Zimbabwe began formal trading of what’s effectively a new currency as it tries to ease a shortage of dollars that’s crushed the economy.
The initial rate for the southern African nation’s currency, known as RTGS dollars, will be 2.5 per U.S. dollar, central bank Governor John Mangudya told business leaders Friday in Harare, the capital. The rate was agreed on with commercial lenders, he said.
Ecobank Transnational Inc.’s local unit and Steward Bank Ltd. were among lenders quoting prices, with rates between 2.44 per dollar and 2.53. The central bank has not said if it will announce trading volumes.
On Wednesday, Mangudya announced that the government would no longer insist that a quasi-currency known as bond notes and RTGS$, an electronic equivalent, were worth the same as the U.S. currency. They’ve been merged and allowed to trade freely on an interbank market.
The black-market rate for the quasi-currencies has since strengthened slightly. But at roughly 3.5 per dollar on Friday, according to local website marketwatch.co.zw, they’re still much weaker than Mangudya’s initial level.
The governor said black-market prices for real dollars were so high because it had been illegal to trade that way and thus they carried a risk premium, which would drop now that trading had been formalised.
“The market has been clamouring for its introduction,” said George Guvamatanga, the permanent secretary in the Finance Ministry. “This is a measure that removes most of the distortions that were impacting the market.”
The measures come as the government scrambles to end a currency shortage that’s pushed inflation to the highest rate since 2008 and sparked shortages of fuel and bread.
The troubles stem from the country abandoning the Zimbabwe dollar in 2009, after a bout of hyperinflation, in favour of the greenback. In 2016, it introduced the bond notes, which aren’t accepted outside the country, to fund rampant spending.
The official inflation rate has soared to 57 percent from less than 4 percent a year ago. Steve H. Hanke, a professor of applied economics at the Johns Hopkins University in Baltimore, calculates it to be even higher, at 269 percent.
“We are expecting the rate on the alternative market will come down,” Guvamatanga said. “The models we have worked on have shown a lower side of 1.86 and a higher end of 2.53.”
He said the models were based on purchasing power parity.
The biggest opposition party, the Movement for Democratic Change, isn’t convinced.
“It’s insanity,” said Tendai Biti, a senior party leader and former finance minister. “They have through the back door reintroduced the Zimbabwe dollar.”
He said the country’s fundamentals won’t support a new currency because there are no reserves to back it up, no market confidence and no macroeconomic stability. Biti estimates that the RTGS dollar will trade at between six and eight to the U.S. dollar.
The central bank will probably have to supply plenty of real dollars to keep the exchange rate stable, according to NKC African Economics, based in Paarl, South Africa.
“To anchor price stability, the Reserve Bank will aggressively intervene in the liquidity market,” Jee-A van der Linde, an economist at NKC, said in a note to clients. “The fact that officials finally came to their senses and ditched the notion that Zimbabwe’s quasi-currency was at par with the U.S. dollar, is comforting.”
Wait and See
Foreign investors in Zimbabwean equities, who have struggled to repatriate dividends or move their money out in recent years because of the dollar squeeze, would probably wait before using the new system, according to Allan Gray Ltd. The Cape Town-based investment manager owns stocks including brewer Delta Corp. Ltd. and Econet Wireless Zimbabwe Ltd.
“It is too early to tell how this new system will work, but it is an important step in the right direction,” said Nick Ndiritu, a money manager at Allan Gray.
“Once the dust settles over the coming days and weeks, the long-term success of any currency reforms in Zimbabwe depends on the extent to which government can curb the growth of money supply and maintain fiscal discipline.”