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Business Reporter
IN a strategic move aimed at stabilising the local currency and easing inflationary pressures, the Reserve Bank of Zimbabwe (RBZ) has adjusted the Zimbabwe Gold (ZiG) exchange rate against the United States dollar by 42,55 percent.
This marks the first official adjustment of the ZiG exchange rate since the currency’s introduction in April this year, with the central bank setting the new exchange rate at ZiG 24,3902 per US dollar, a sharp increase from the previous trading range of ZiG13,6 to ZiG14 per dollar.
The decision is intended to alleviate mounting pressure on the foreign currency market and curb inflation, which has been a persistent challenge in recent months.
The exchange rate adjustment comes in response to rising open market exchange rates and the surge in demand for foreign currency, particularly US dollars.
The ZiG downslide against the greenback had started to pose pricing challenges for retailers, causing distortions that pushed prices higher both in US dollars and the local currency.
This tipped the scale of competitiveness in favour of informal traders, the majority of which do not pay any taxes to the Government, despite moving huge volumes of business in US dollar cash.
In instances where local currency prices charged for registered retailers trailed the open market rate by a huge margin, the situation caused viability challenges for registered traders.
By allowing the official exchange rate to align more closely with market realities, the RBZ hopes to reduce speculation and diminish the appeal of the black market, where the US dollar is trading at a significant premium.
The central bank’s decision is also expected to ease liquidity pressures in the foreign currency market by reducing the amount of local currency chasing the limited supply of US dollars.
This should help stabilise the exchange rate, a key priority for the RBZ, which has faced increasing challenges in managing the growing demand for foreign currency.
Further, the development will eliminate pricing distortions in a market where traders are compelled to use the official exchange rate while also helping close arbitrage gaps where informal traders buy from formal traders, at the ruling official rate, and sell in the informal market in hard currency, making 100 percent profit.
Prior to the adjustment, the central bank had already taken steps to address currency instability by injecting US$64 million into the interbank market in September 2024, with RBZ governor Dr John Mushayavanhu confirming that US$24 million was injected in the first two weeks, followed by an additional US$40 million on September 19.
This should clear a significant amount of the excess liquidity chasing the greenback on the parallel market, creating pressure on the exchange rate.
In conjunction with the rate adjustment, the RBZ has also implemented a series of monetary tightening measures aimed at addressing inflation and maintaining macroeconomic stability.
Meanwhile, at its meeting held in Harare yesterday, the Monetary Policy Committee (MPC) of the central bank raised its key interest rate by 15 percentage points, from 20 percent to 35 percent.
The benchmark rate determines the minimum rate at which banks lend, as such the adjustment should slow-down credit creation as it makes borrowing for speculative purposes more expensive.
This aggressive increase is designed to dampen inflationary pressures and cool down speculative borrowing and lending, which have been exacerbating exchange rate volatility.
“The resurgence in exchange rate pressures since mid-August has necessitated a firm response,” explained Dr Mushayavanhu.
“Despite stable conditions earlier in the year, recent market dynamics have driven inflation higher, with August recording a 1.4 percent inflation rate, up from an average of -0,82 percent between April and July. The widening premium in the parallel market is a clear signal that we need to restore confidence and keep inflation expectations anchored.”
Additionally, the RBZ has raised statutory reserve requirements for both local and foreign currency deposits to tighten liquidity and curb inflationary pressures.
The reserve requirements for demand and call deposits were increased to 30 percent, while those for savings and time deposits were raised to 15 percent. These measures seek to mop up excess liquidity in the market, which has been a significant driver of inflation.
“Through raising statutory reserve requirements and policy rates, we intend to restrain speculative lending and borrowing that have exacerbated exchange rate pressures,” said Dr Mushayavanhu.
“These actions will help cool down demand-side inflationary forces and stabilise the broader macro-economic environment.”
In another effort to control foreign currency outflows, the central bank has reduced the cap on individual foreign currency allowances, limiting the amount that can be taken out of the country from US$10 000 to US$2 000.
This measure is intended to conserve the country’s foreign reserves and reduce pressure on the foreign currency market, a critical area of concern as the RBZ continues to navigate the challenges posed by speculative activity on the parallel market.
While these policy measures have been welcomed by some as necessary steps to stabilise the economy, concerns remain about the potential impact on economic growth.
The sharp increase in interest rates and higher reserve requirements could dampen growth in key sectors such as agriculture and manufacturing, as the cost of borrowing rises and liquidity becomes more constrained.
Dr Prosper Chitambara, a leading economist, acknowledged the need for monetary tightening but warned of the potential risks.
“The RBZ’s decision to hike interest rates is a textbook response to currency depreciation and inflationary pressure. However, there are concerns that this could constrain much-needed growth in key sectors like agriculture and manufacturing. By tightening monetary conditions too aggressively, we risk limiting productive investment and stifling recovery efforts,” he said.
Dr Chitambara also emphasised the importance of complementing monetary tightening with structural reforms, particularly in the foreign exchange market.
“Allowing greater exchange rate flexibility is important, but unless we address the structural imbalances in our foreign exchange markets, such as the dominance of parallel market activity, these measures will only have short-term effects,” he added.
The central bank has expressed its commitment to monitoring the situation closely and responding to any further risks to macro-economic stability.
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