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Markets should determine exchange rate, says IMF

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Zimbabwe’s currency reforms can be successful to the extent that the country’s authorities let market forces work, the International Monetary Fund (IMF) has said.

The Bretton Woods institution said market-determined exchange rate and interest rates will take the country forward.

Last month, the country’s central bank governor Dr John Mangudya introduced an official inter-bank foreign exchange market.

The move was aimed at curbing a proliferating illegal foreign currency market where the United States dollar was trading at premiums of around 4 bond notes (the country’s fiat currency) to 1 US dollar.

“Our initial evaluation of that which has been announced by the Zimbabwean authorities recently is that it’s a step in the right direction to address distortions that have significantly impaired those macroeconomic outcomes that I’ve mentioned.

“Its success, of course, the currency reforms’ success will depend on the implementation of an effective overall monetary policy framework supported by market-determined interest and exchange rates, together with prudent fiscal policies,” said IMF director of communications Gerry Rice.

The country’s local currency (bond notes and electronic dollars, which were consolidated into the ‘RTGS dollar last month) has been firm at a’ official’ rate of 2.5 to the U.S dollar as the Reserve Bank of Zimbabwe has maintained strict restrictions on trading and exchanging.

Announcing the Monetary Policy Statement on February 20, Dr Mangudya pledged to let the RTGS dollar trade freely.

Despite the rate remaining largely unchanged at circa 2.5, the authorities have maintained that the rate will achieve equilibrium within the next two to three months.

Zimbabwe’s currency reforms effectively let to the abandonment of a long-standing but ineffective 1:1 dollar peg for its fiat currency.

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