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Mangudya forecasts RTGS$ equilibrium with US dollar

by Staff reporter
15 Mar 2019 at 17:17hrs | Views
RESERVE Bank of Zimbabwe (RBZ) governor John Mangudya forecasts an exchange rate equilibrium between the Real-Time Gross Settlement (RTGS) dollar and the United States dollar on the inter-bank trading platform and informal market, riding on concerted efforts towards shoring up confidence in the local currency, boosting productivity and export earnings.

Exchange rate equilibrium is a balance between the supply and demand in currencies in competing markets.

Although the RBZ liberalised the exchange rate between the local unit and the greenback following the announcement of a raft of monetary policy measures in February, arbitrage remains rife, owing to variances in trading ratios between the RTGS dollar and the greenback on the parallel market and the interbank platform. At the time of going to print, US$1 was fetching as much as RTGS$4 on the black market with the local currency slightly firming up against the greenback at a trading ratio of US$1: RTGS$2,7 on the interbank platform. Market players have, however, cautioned the monetary authorities to manage the value of the local unit and the greenback on the interbank platform taking into account prevailing rates on the parallel market.

The monetary policy reforms, announced on February 20, were a departure from the official position that the local unit was trading pari passu with the US dollar, although the country's bond currency was rapidly losing value against the greenback, judging by market trends.
Arbitrage is the process of a simultaneous sale and purchase of currencies in two or more foreign exchange markets with the objective of making profits by capitalising on the trading rate differentials in various markets.

The newly introduced RTGS dollar, an amalgam of existing electronic balances, bond notes and coins in circulation, is gradually weakening against the greenback following the introduction of the interbank market, although there is still wide room for arbitrage on the alternative market.

Mangudya told the Zimbabwe Independent this week that the apex bank's attention is focussed on evening out the exchange rate between the RTGS dollar and the greenback on the interbank trading platform and the alternative market, rather than extinguishing the forex parallel market.

"We have said, many times, in all economies there is always the black market for foreign currency," he said.

"Over time, there will be equilibrium (between RTGS dollar exchange rate against the US dollar. Our system is only a month old. At some point we will have this equilibrium. Over the next three months there should be equilibrium." He said boosting the country's productive capacity and improving export earnings would help achieve that equilibrium.

The central bank chief highlighted that since inception of the interbank platform, the bulk of foreign currency transactions were being processed through the system, with only "small" purchases and sales being done on the parallel market.

"We do not expect all transactions to go through the interbank platform. Above 80% to 90% foreign currency transactions are being done over the interbank platform. What we know is that small transactions are being done on the black market," Mangudya said.

The RBZ chief this week told the Public Accounts Parliamentary portfolio committee this week that transactions totalling US$12 million were handled on the interbank trading platform during the same period.

The success of the interbank trading platform, whose core purpose was to level the exchange rate on the parallel market and the formal banking channel, Mangudya said, was anchored on "building confidence" and fostering transparency in the newly introduced system.
"We should ensure that there is transparency on the platform. Currency is about confidence, competitiveness and productivity," he said.
"They (banks) have finished configuring their systems. The system is up and running."

Mangudya said achieving a stable trading ratio on the alternative market and the interbank trading platform will gain momentum when the tobacco marketing season commences on March 20. Tobacco receipts account for 80% of Zimbabwe's export earnings.

Last month, Mangudya told the Independent that the apex bank had introduced the interbank trading platform through announcement of a raft of monetary measures to contain spiralling prices of basic commodities as well as stabilising the exchange rate, which hitherto had sparked an unrelenting currency volatility crisis. It was also introduced to tame runaway inflation, which prominent economist Steve Hanke puts at over 200%, though officials peg it at over 50%.

This week, the central bank chief warned Parliament that awarding public sector workers a minimum salary of $3 000, up from an average of $400, would spark inflationary pressures while plunging the country into a major recession.

Civil servants have been demanding a wage increase following introduction of a cocktail of fiscal and monetary reforms which saw government abandoning its 1:1 peg of the local unit and the greenback last month and the 150% fuel price hike in January which sparked nationwide protests.

Source - the independent