Zimbabwe’s Treasury has announced the introduction of a managed float exchange rate system, which will basically allow exchange rates to fluctuate on a day-to-day basis.
But the fact that it will be “managed” means the country’s central bank – the Reserve Bank of Zimbabwe (RBZ) – will attempt to intervene to maintain the rates ‘stable’.
‘Dirty float’ basically refers to a floating exchange rate where a country’s central bank occasionally intervenes to change the direction or the pace of change of a country’s currency value. Zimbabwe’s local currency has devalued from an initial rate of 2.5 to the United States dollar when the official interbank market was introduced in February 2019 to the current rate of circa 18.
Observers say the move by Zimbabwe’s fiscal and monetary authorities to introduce a dirty float is to try and contain the level of devaluation of the Zimbabwe dollar, which was re-introduced in June last year.
“In most cases, central banks in a dirty float system tend to act as a bulwark against an external economic shock before its effects become disruptive to the domestic economy,” said an analyst.
But it’s not intrinsically wrong.
The managed float regime is the current international financial environment, through which exchange rates fluctuate on a day-to-day basis, although central banks attempt to influence their countries’ exchange rates by buying and selling currencies to maintain a certain range.
But a dirty float system cannot be viewed as a real floating exchange rate insofar as – ideally – truely floating rate systems do not allow for any sort of intervention.
Said Finance and Economic Development Minister Mthuli Ncube this afternoon:
“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. To correct this anomaly, an electronic forex trading platform based on the Reuters system is being immediately put in place.
“This platform will allow foreign exchange to be traded freely amongst the banks and permit a true market exchange rate to be determined. The Bureaux de Change, will also participate on this platform through their Authorised Dealers.
“The trading rules of the Bureaux de Change are being liberalised so that they can conduct all wider range of transactions. The RBZ will continue to be a significant player in the market, providing liquidity to stabilise the exchange rate, where necessary.
“This mechanism will be immediately operational. All the foreign exchange requirements will be available through the interbank market which will use a market determined exchange rate.”
The move is the latest development to changes in Zimbabwe’s broader monetary system
The country witnessed significant monetary and exchange control policy changes in 2016 and increasingly through last year.
The central bank and Treasury initiated a series of exchange control operational guidelines and compliance frameworks during this period.
Specifically, there was a requirement for banks to separate foreign currency accounts (FCAs) into two categories, namely RTGS FCA and Nostro FCA during October 2018, and although the rate was legally pegged at 1:1, multiple pricing practices and other transactions observed and reported publicly indicated exchange rates other than 1:1 between RTGS and the US$ amounts.
Last February, a Monetary Policy Statement (MPS) introduced the RTGS dollar (RTGS$) and the interbank foreign exchange market.
And in June of the same year, the Government ended the long-standing multicurrency system (introduced early 2009) and re-introduced the Zimbabwe dollar.
But analysts said the re-introduction of the local currency was ill-conceived as Zimbabwe lacked the economic fundamentals to sustain a local currency, and this has been highlighted by the consistent loss of value in that currency.