Reserve Bank of Zimbabwe (RBZ) Governor John Mushayavanhu has linked the recent sharp decline in the newly introduced Zimbabwe Gold (ZiG) currency to a limited number of foreign currency sellers operating under the current willing-buyer, willing-seller exchange system.
In a recent interview with The Sunday Mail, Mushayavanhu explained that the adjustment of the official exchange rate was a response to temporary pressures not reflective of the country’s economic fundamentals. He noted that an artificial surge in demand for foreign currency, coupled with inflationary pressures, prompted this change.
On September 27, the RBZ set the new official exchange rate at ZiG24.3 per US$1, a substantial increase from the prior rate of approximately ZiG14.1 per US$1. Mushayavanhu stated:
The interbank foreign exchange market under the willing-buyer, willing-seller arrangement allows market forces to dictate the exchange rate, while the ZiG’s backing by gold and other reserves is crucial for minimizing exchange rate volatility caused by temporary supply-demand shocks.
However, the multi-currency system poses challenges, as there are few foreign currency sellers, creating a buyers’ market. Foreign currency generators can choose to settle domestic transactions in foreign currency, which reduces their incentive to convert it.
The RBZ can intervene when temporary exchange rate pressures arise that are not linked to economic fundamentals, yet it also allows the exchange rate to adjust according to market conditions. This approach was emphasized in the April 2024 Monetary Policy Statement.
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