Exchange rates tumble after RBZ currency floatation

Rates for money transfers which had peaked at £1:Z$420 million last week, went down dramatically to Z$230 on Friday as money transfer agents assessed the impact of the floatation on the currency market.

Previously, exchange rates had been fixed at Z$30,000 to the US dollar, although rates on the parallel market were as high as Z$200 million.

Reserve Bank of Zimbabwe Governor Gideon Gono said the country would move away from the current exchange rate to a willing buyer, willing seller policy.

“Under this framework, authorised dealers will match sellers and buyers of foreign exchange guided by a predetermined priority list as set from time to time by the Reserve Bank,” the governor said in his monetary policy speech.

The rate drop has been attributed to confusion in the market regarding the impact of the policy changes. Money transfer agents are waiting to see the reaction by Zimbabwean companies, particularly banks to the new policy.

Lance Mambondiani, an Investment Executive at Coronation Financial Holdings said the floatation of the currency was likely to squeeze some briefcase money transfer agencies out of business as big players muscle in on the lucrative foreign currency market.

“The floatation of the currency market is hugely significant to the central bank's economic turnaround plan as it will result in a substantial increase in foreign currency receipts,” Mambondiani, a columnist for the New Zimbabwe newspaper said.

He added: “It is, however, unlikely that the exchange rate liberalisation will cause the black market to disappear. Zimbabwe has always had a foreign currency deficit before the currency was pegged in 2001.

“The issue of devaluation has been resisted for many years by the government, you will remember it was for this very reason that Dr Simba Makoni lost his job as Finance Minister.”

The acceptance that a floatation and not quasi-fiscal activities was necessary to resuscitate industries is a major economic and political climb-down, Mambondiani said.

He added that the money transfer business would return to formalised businesses.

“This is because as exchange rates will become more uniform across traders, clients will consider the security of transfer as more important than exchange rates. The net result in the short-term would be too much Zimbabwe dollars chasing all the currency on the market."

Whilst it is expected that the rates will go up again, the majority of Zimbabweans in the Diaspora who regularly send money to their relatives in Zimbabwe will see the value of their transfers halved since last week.

The floatation - also central to the opposition MDC's economic turnaround policy - has been widely received as a positive step which was long overdue.

Article published courtesy of NewZimbabwe.com