Liberalised market expected to generate foreign currency for struggling economy

The Confederation of Zimbabwe Industries (CZI) sees the parallel market exchange rate correcting when it reaches Real Time Gross Settlement (RTGS)$8:US$1, saying there is not enough stock of the local currency in circulation to chase the greenback.

Outgoing CZI president Sifelani Jabangwe told businessdigest this week that the local currency would firm marginally against the greenback.

"The exchange rate should be based on the actual money or actual RTGS dollars that are chasing the available US dollar.

"With the stock of US$ that we currently have, an exchange rate of 7 and 8 is too high and not sustainable. I feel there is not enough RTGS' chasing that US dollars.

So what we will possibly see is that at some point very soon that rate will come down or I don't see it continue to go above 8 because that could be going against fundamentals," he said.

Jabangwe said it was imperative to foster confidence and transparency around the operations of the interbank trading platform.

Meanwhile, the CZI believes the ongoing fuel shortages will improve as the value of the local unit reflects its fair value.

"We believe that the liberalised exchange rate would help with that and we also hope as the confidence is built we should have a stabilisation of that rate and even a slight coming down of the exchange rate but for that to happen we need confidence to set in," he said.

"This confidence will be a result of people seeing a transparent trading platform which will be used for trading in this currency."

The liberalised market is expected to generate foreign currency in the country since there is now a soft exchange rate. The availability of foreign currency will promote more competition in the export market since purchasing products in the local market is cheaper compared to the imported products.

This comes after Reserve Bank of Zimbabwe (RBZ) governor John Mangudya told businessdigest in February that the value of the local unit, which has been weakening against the US dollar, would reach "equilibrium" in the short term.

Last week, Mangudya instructed banks to align their foreign currency exchange rates to parallel market rates, a move seen as further evidence he wants to free the exchange rate and end arbitrage opportunities in the market.

After the announcement of the new exchange rate regulations, parallel market rates shot to US$1:RTGS$7.

Market watchers see rates on the parallel market soaring on the back of the recent liberalisation of the exchange rate on the interbank platform, as well as new regulations around fuel procurement. Under the new regulations, government is no longer subsidising the importation of fuel.