"Confidence Deficit Causing Exchange Rate Volatility"

The Reserve Bank of Zimbabwe (RBZ) governor John Mangudya said that a lack of confidence in the market is one of the major causes of currency volatility.

Speaking during an interview with Business Times, Mangudya said the economic fundamentals to support exchange rate and price stability are in place, hence the need to address the lack of confidence in the market. Said Mangudya:

Instead, the confidence deficit is one of the major drivers of exchange rate and currency volatility which the government and the bank are currently addressing to arrest the current situation.

Besides confidence, appetite for US$ for a store of value, speculative behaviours and general market indiscipline are also causing the challenges of currency volatility. But with confidence, some of these challenges will be addressed.

The Zimbabwe dollar has continued to depreciate against the US dollar on both the formal and informal markets.

The exchange rate this week stood at between ZWL$500 and ZWL$550 to US$1 on the parallel market, while it (the local currency) was trading at ZWL$338.49:US$1 at the auction system.

Economist Gift Mugano told Business Times that confidence and excessive money supply among other factors are driving exchange rate volatility in Zimbabwe. Mugano said:

Now on confidence, we need to understand the major driver of the confidence deficit. We need a paper on this but just on the top of my head, they must do a proper study on what problems the people have with policymakers.

But on top of my head when people lose their money more than twice in two decades I’m talking about extreme cases where we had a collapse of the ZWL$ in early 2009 and in 2019 people lost all their savings in US$ so they have no confidence in the system. Generally, the people don’t trust the system.

From 2018 this government has made a number of policy mistakes where policies were announced and reversed people might have forgotten let’s say the ban of Ecocash within three days reversed, suspension of the stocks market for a number of months again it was reversed just on 7th of May there was the suspension of lending these are shocks and some of these shocks are permanent shocks even if the suspension is lifted because it leaves a scar which is permanent that when you are trading in this economy you have to be careful.

University of Zimbabwe economics lecturer Moses Chundu said confidence deficit simply means citizens have lost trust in their currency and by extension in monetary authorities.

More: Business Times