KEY POINTS
- Zimbabwe’s Treasury Secretary rules out immediate exchange rate convergence.
- Dual exchange rates remain in place to manage economic stability and currency volatility.
- Government focuses on inflation control and maintaining financial stability.
Zimbabwe’s Treasury Secretary has ruled out the chances of parity between the official and the black market exchange rates saying that it will cause instability in the economy.
Since this currency volatility persists as a major issue for the nation’s economy, it has become inevitable to retain the dual currency regime as a protective mechanism for the government to ensure inflation stability and financial stability.
There is no prospect of exchange rate convergence on the horizon
The exchange rate problem has been a thorny issue in Zimbabwe for a long time now, where the official rate is always far much lower than the parallel market rate.
Some expected the government to act in order to bring the two rates closer and make the currency market less unpredictable. But the Treasury has dismissed any such move in the near future.
A senior Treasury official said Zimbabwe ‘will not allow the official and parallel exchange rates to converge’ because having two rates is a useful tool for dealing with economic volatility.
The decision has put paid to expectations of exchange rate convergence, which many analysts have said would help to introduce more certainty into the Zimbabwean environment for investors and companies.
Inflation and stability of currency still as integral goals
The following table shows inflationary rates in Zimbabwe which have been volatile and occasionally rose to triple digits for many years now.
Although the government has managed to tame the inflationary factors, the exchange rate convergence may trigger other problems for instance the volatility of prices and pressure on the Zimbabwean dollar.
The officials of the Treasury continue to work towards the achievement of fiscal stability and the avoidance of inflation. The pressures of such a system can be controlled by the government through retaining the dual exchange rate system, though there have been complaints from the international economic bodies and local investors.
New Zimbabwe reported that the Treasury opines that the current approach is necessary to protect Zimbabwe’s financial system in a volatile economic climate.
The parallel market rate obeys the law of supply and demand, so the official rate stays relatively stable for the authorities to manage currency instability.
Economic issues and international forces
Many shirts have affected Zimbabwe’s economy in recent times such as; inadequate foreign currency, lack of investors, and loss of regional business through blacklisted by western countries.
The government, despite sanctions of the dual exchange rate system, has been able to manage such economic complexities. But it has also led to increased market distortions where most companies rely on the parallel market for their currency requirements.
However, Treasury officials have defended the convergence saying that it could lead to volatility and reverse the little progress that has been made in the country’s economy over the past few years.
For now, the emphasis will continue to be placed on the stabilization of the domestic currency and better control of inflation before any serious steps towards the establishment of a single exchange rate will be taken.
Hope for future reforms
While the exchange rate unification is out of the question there is some hope that with more time the Zimbabwean economy will become stabilized and its further development might offer the ground for some changes that can solve the existing dual rate system problem.
As inflation is gradually being tamed, there is a possibility that Zimbabwe can build a better environment that will support growth and investment. Before then, the government’s conservative approach to exchange rates is in line with its desire to preserve stability rather than push through reforms at a fast pace.
