Zim rules out flexible exchange rate

HARARE – Zimbabwe will not liberalise the exchange rate soon because of widespread indiscipline in the economy, central bank head Gideon Gono said yesterday, but he did not rule out reverting to a free-float system by 2007.

Pressure is mounting for the government to liberalise the exchange rate to alleviate a foreign currency shortage, which has resulted in acute fuel and food shortages, and forced companies to operate at 30 per cent of their capacity. Responding to a letter from a Zimbabwean living abroad on the need for a flexible exchange rate published in the state-owned Herald, Gono said the market could not be left to determine the exchange rate because of greed by some players.Zimbabwe suspended a free-float system for the local dollar shortly after November 1997 when the unit came under speculative attack.The currency was pegged to the dollar after a falling out with the donor community in 1999, including the International Monetary Fund, which suspended financial aid to the country over policy differences with President Robert Mugabe’s government.Government seizures of white-owned farms for resettlement by landless blacks have isolated the former British colony and pushed its economy into a recession that has lasted for six years, pushing inflation into triple digits.The central bank has now moved to a crawling exchange rate peg through weekly auctions it administers.But these currency auctions are only meeting about 10 percent of the foreign exchange needs of local companies, which are unable to import vital machinery.On May 19 the bank devalued the local unit by 31 per cent to 9000/US$, and allowed it to slide further at the weekly auctions.It was quoted at 10 800/US$ at Monday’s auction, bringing its depreciation since the devaluation to 16,7 per cent.But black market rates are said to be double that price.Vision 2007 is the Reserve Bank’s blueprint to turn around the economy, which has suffered six years of recession and is grappling with one of the highest inflation rates in the world.Commercial banks are giving individuals selling foreign currency through them a 25 per cent bonus above the prevailing auction rate in a bid to discourage people from changing money on the black market.-Nampa-ReutersResponding to a letter from a Zimbabwean living abroad on the need for a flexible exchange rate published in the state-owned Herald, Gono said the market could not be left to determine the exchange rate because of greed by some players.Zimbabwe suspended a free-float system for the local dollar shortly after November 1997 when the unit came under speculative attack.The currency was pegged to the dollar after a falling out with the donor community in 1999, including the International Monetary Fund, which suspended financial aid to the country over policy differences with President Robert Mugabe’s government.Government seizures of white-owned farms for resettlement by landless blacks have isolated the former British colony and pushed its economy into a recession that has lasted for six years, pushing inflation into triple digits.The central bank has now moved to a crawling exchange rate peg through weekly auctions it administers.But these currency auctions are only meeting about 10 percent of the foreign exchange needs of local companies, which are unable to import vital machinery.On May 19 the bank devalued the local unit by 31 per cent to 9000/US$, and allowed it to slide further at the weekly auctions.It was quoted at 10 800/US$ at Monday’s auction, bringing its depreciation since the devaluation to 16,7 per cent.But black market rates are said to be double that price.Vision 2007 is the Reserve Bank’s blueprint to turn around the economy, which has suffered six years of recession and is grappling with one of the highest inflation rates in the world.Commercial banks are giving individuals selling foreign currency through them a 25 per cent bonus above the prevailing auction rate in a bid to discourage people from changing money on the black market.-Nampa-Reuters