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It Is Pointless To Maintain 1:1 Illusion If the Second Republic Is To Be Taken Seriously - Imara Asset Management

5 years agoThu, 18 Oct 2018 11:23:33 GMT
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It Is Pointless To Maintain 1:1 Illusion If the Second Republic Is To Be Taken Seriously - Imara Asset Management

In its quarterly report titled Zimbabwe Investment Notes, Imara Asset Management noted that the government should move away from the “illusion” of trying to maintain that the exchange rate for the United States Dollar and the Bond Notes/ RTGS stands at 1:1. Instead, the asset management company advised the government to allow the market to determine the rates. Part of the report reads,

The hyperinflation years are fresh in the minds of most Zimbabweans which has rightly resulted in a lack of trust in Zimbabwe’s economic and monetary authorities, hence our consistent argument that a local Zimbabwe currency will never be sustainable for very long for years if not decades to come.

If this new Government of the Second Republic is to be taken seriously, then it is pointless to maintain this 1:1 illusion. Looking at the monthly economic bulletins published by the RBZ, actual USD held by the banking system in nostros and cash should amount to around 20% of all deposits. As such a rate of 5RTGS$ to 1USD would be about right on a worst case scenario in part because those numbers exclude any foreign currency that might be held outside of the banks and under mattresses or in the informal sector. In short, the rate has certainly overshot this past week as panic set in.

The authorities should now allow the banks and the private sector to trade between the two FCA accounts and thereby formalise an exchange rate between RTGS$ and USD that is set by the free market. Interest rates on the two accounts also need to be liberalised with higher rates being offered for RTGS$ vs USD rates.

This could result in the RTGS$ strengthening against the USD thereby halting the slide. Critical to RTGS$ stability though will be the immediate cessation of RTGS$ creation in order to fund Government expenditure. Over time, as confidence grows in the Government and the monetary authorities, then that rate could converge further with the USD.

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At the time of publishing the exchange rate for the USD to the Bond to the RTGS stands at 1:4, a premium of 300 percent.


 

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