Rising Inflation And Forex Demand Surge Forced ZiG Rate Adjustment, Says Mushayavanhu
Reserve Bank of Zimbabwe (RBZ) Governor John Mushayavanhu has attributed the recent sharp depreciation of the newly introduced currency, the Zimbabwe Gold (ZiG), to a limited number of foreign currency sellers operating under the current willing-buyer, willing-seller system.
In an interview with The Sunday Mail on Saturday, Mushayavanhu explained that the adjustment of the official exchange rate on Friday was a response to temporary pressures that do not reflect the country’s economic fundamentals.
He said an artificial spike in demand for foreign currency, combined with inflationary pressures, necessitated this adjustment.
On Friday, September 27, the RBZ set the new official exchange rate at ZiG24.3 per US$1, a significant increase from the previous range of approximately ZiG14.1 per US$1. Said Mushayavanhu:
The current interbank foreign exchange market under the willing-buyer, willing-seller trading arrangement has always allowed market forces to determine the exchange rate, while the backing of the ZiG using gold and other reserve assets is critical for ensuring limited exchange rate volatility caused by transitory demand-supply shocks.
However, the challenge with the multi-currency system is that there are limited sellers of foreign currency, making it a buyers’ market, as generators of foreign currency, have an option to settle domestic transactions in foreign currency, hence less incentives for them to convert.
Under the current exchange rate arrangement, the Reserve Bank can intervene in the market in the event of transitory exchange rate pressures not linked to economic fundamentals.
The bank, however, allows the exchange rate to adjust in line with the obtaining market conditions. This is the stance the Reserve Bank has taken today.
As such, the exchange rate has always been market-determined. This position was clearly stated in the April 2024 Monetary Policy Statement.
Mushayavanhu said the value of ZiG is designed to reflect movements in reserve assets, such as gold, and the inflation differential between ZiG and the US dollar. He said:
The underlying value of the structured currency (ZiG) is designed to mimic the movement in the prices of reserve assets backing it and the inflation differentials.
In this regard, as communicated in the April 2024 Monetary Policy Statement, the intervening exchange rate shall be determined by the inflation differential between ZiG and USD inflation rates and the movement in the price of the basket of precious minerals held as reserves.
In this regard, while the gold price has been firming, suggesting appreciation of the gold price-implied exchange rate, the country has witnessed increased inflationary pressures as evidenced by month-on-month inflation of 1,4 per cent in August 2024 and 5,8 per cent in September 2024, thus offsetting the firming gold price.
This has, therefore, underscored the need for a price discovery mechanism to align the exchange rate with the macroeconomic dynamics underpinning the structured currency.
The movement in the exchange rate is expected to play a critical shock-absorbing impact on the prevailing excess liquidity in the economy, which helps anchor inflation expectations and minimise the inflation differentials going forward.
Mushayavanhu added that the recent US$110 million injection by the central bank has been crucial in sustaining economic activity.
He said these foreign currency injections helped address the backlog of demand at banks, ensuring essential imports could be financed despite limited currency availability.
This intervention has contributed to maintaining a steady supply of goods during a drought exacerbated by El Niño weather conditions, according to Mushayavanhu.
The ZiG is backed by the value of precious minerals, especially gold, as well as the foreign currency reserves maintained by the RBZ.
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