Government should back the weakening Zimbabwe dollar with foreign currency reserves in the face of currency volatility and high inflation, multiple analysts have said.
The call for reserve accumulation comes at a time of heighted currency volatility with the Zimbabwe dollar this week weakening to ZWL$450:US$1 on the parallel market as Zimbabweans rushed to get their hands on the greenback.
The local currency was this week trading at ZWL$258:US$1 at the auction system and ZWL$295.6 : US$1 at the interbank market.
Zimbabwe has struggled with high inflation with the annual rate rising to 131.7% in the month of May from 96.43% in April, according to figures published by ZIMSTATS on Wednesday.
“…The local currency continues to lose value on a daily basis. The market will always get rid of it as soon as it reaches the account. For it to weather all the storms that it is failing to withstand now , it should be backed by strong reserves,” the Confederation of Zimbabwe Industries (CZI) president, Kurai Matsheza, told Business Times.
In its recent submissions to the Reserve Bank of Zimbabwe (RBZ) and Treasury, CZI said Zimbabwe was at a point where a mono currency ZWL$ without the international backing was not ideal.
“It is important that a balanced approach is taken to bring back the local currency from the brink of rejection that it faces now in the face of exchange rate instability and increasing inflation. We must by all means avoid the rushed decision to prematurely introduce a mono currency as the consequences of such are known from the recent past.”
The Zimbabwe National Chamber of Commerce (ZNCC) also said the Zimbabwe dollar needed strong international reserves backing to stand on its own.
“From the Chamber’s perspective, fast paced de-dollarisation is not ideal given the prevailing volatile exchange rate situation and wayward inflation on the other hand. We therefore commend the government’s stance to continue with the dual currency system until such a time when the local currency is backed by international reserves,” ZNCC said.
Industry players believe there is a complete loss of faith in local currency .
Crystal Candy general manager Jimmy Psillos said it was critical to back the Zimbabwe dollar with international reserves.
“The authorities should back the local currency with reserves using an explicit formula that guarantees convertibility like what Botswana, Hong Kong and Bulgaria did. Possible advantages of backing the currency include guaranteed stability, government can freely spend their own money and shortcut to confidence,” Psillos said.
Alliance Holdings executive chairman, Joseph Kanyekanye said having three exchange rate systems -the auction system, the interbank and the parallel market- was not working.
“There is a need to amend the Reserve Bank of Zimbabwe Act as it was a problem due to its quasi fiscal activities hence broad money supply our own man-made problem as a result of this. The central bank should be confined to its core business via the amendment of the Banking Act. Convergence can be reached if we remove distortions plus reduce agency theory constraints, repeal Statutory Instruments that criminalise industry for wanting to survive and stop edicts prone to manipulation,” Kanyekanye said.
Meanwhile the Political Actors Dialogue (POLAD) will be holding a currency indaba in the capital next Thursday as part of efforts to come up with solutions to tame currency volatility and rising inflation.
POLAD’s economic Committee chairman, Trust Chikohora, confirmed the development saying: “Business member organisations in attendance will include CZI, ZNCC, the Banker’s Association of Zimbabwe, associations of SMEs and associations of small-scale miners to name a few. Labour organisations will include the Zimbabwe Congress of Trade Unions (ZCTU), Zimbabwe Farmers Union (ZFU), the consumer council, the Zimbabwe Stock Exchange and the Zimbabwe Economic Society.”
Chikohora added: “Civil Society organisations such as Women of Zimbabwe Arise, the Zimbabwe Coalition of Debt and Development (ZIMCODD) will also be there… Government will be represented by the Ministry of Finance, Reserve Bank and other ministries particularly in the economic cluster.”
Chikohora said President Emmerson Mnangwa will be the guest of honour at the indaba.