Liberalised Foreign Exchange Market in Zimbabwe

Foreign Exchange Market Liberalisation

The exchange rate liberalization means the permission for the currency to be exchanged with foreign currencies for economic transactions that promote the economy and economic welfare of the general public. The exchange rate liberalization is the route to link the domestic economy with the global economy in pursuit of economic benefits advocated by principles of international economics.

Background

When Zimbabwe introduced the local currency in 2019 it was not enough in circulation to chase the greenback. The government decided to liberalise the foreign exchange market to stabilise the exchange rate. These sentiments were also shared by industrialists. The Confederation of Zimbabwe Industries believed that the liberalised exchange rate would help with that and also hoped that as the confidence is built it should stabilise the rate and even a slight coming down of the exchange rate but for that to happen confidence needed to set in. This confidence was to be a result of people seeing a transparent trading platform which was to be used for trading in this currency.

The liberalised market was expected to generate foreign currency in the country since there was now a soft exchange rate. The availability of foreign currency was to promote more competition in the export market since purchasing products in the local market was cheaper compared to the imported products. This came after Reserve Bank of Zimbabwe (RBZ) governor John Mangudya told businessdigest in February 2019 that the value of the local unit, which had been weakening against the US dollar, would reach “equilibrium” in the short term.[1]

Zimbabwe liberalises foreign exchange market

Treasury introduced an electronic forex trading platform based on the Reuters model in March 2020, which allows banks and bureaux de change operators to freely trade foreign exchange. The move was expected to create a true market exchange rate and enhance transparency and effective foreign exchange trading on the formal channels. This comes at a time when the country is experiencing exchange rate volatility and inflation largely driven by speculative parallel market activity.

Announcing the decision at a Press conference in Harare Finance and Economic Development Minister, Professor Mthuli Ncube, said Zimbabwe has had no transparent and effective foreign exchange trading platform for a long time. Consequently, he acknowledged that official rates have not been effectively determined, while a thriving parallel market has developed.

“To correct this anomaly, an electronic forex trading platform based on the Reuters system is being immediately put in place. This platform will allow foreign exchange to be traded freely amongst the banks and permit a true market exchange rate to be determined,” said Prof Ncube.

“The Bureaux de Change, will also participate on this platform through their authorised dealers. The trading rules of the Bureaux de Change are being liberalised so that they can conduct all wider range of transactions.”

The minister said the Reserve Bank of Zimbabwe will continue to be a significant player in the market by providing liquidity to stabilise the exchange rate, where necessary.[2]



References

  1. Cloudine Matola/Lisa Tazviinga, [1], Zimbabwe Independent, Published: 31 May, 2019, Accessed: 29 October, 2020
  2. [2], Chronicle, Published: 11 March, 2020, Accessed: 29 October, 2020