Zimbabwe Urged to Abandon Command Exchange Rate Policy for Economic Stability

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Zimbabwe is urged to abandon its fixed exchange rate policy for the ZiG currency, as this has led to significant struggles for retailers who face unsustainable conditions due to currency distortions. Economists advocate for a free-floating exchange rate to stabilize the economy and improve market confidence amid substantial gaps between official and parallel market exchange rates.

The government of Zimbabwe is under growing pressure to discontinue its fixed exchange rate policy regarding the Zimbabwe Gold (ZiG) currency, which was introduced in April. This policy has led to significant challenges for businesses that are increasingly unable to sustain operations due to imposed adherence to an official exchange rate that is misaligned with market realities. Retailers have indicated that they have been compelled to adjust prices in ZiG to mitigate losses stemming from the rapidly devaluing local currency on the parallel market. Economist Gift Mugano has criticized the current exchange rate approach and has called on the Reserve Bank of Zimbabwe (RBZ) to permit the ZiG to operate freely within the market. “The central bank must liberalize the exchange rate,” Mugano stated. He emphasized that while the implementation of correct policies is essential, the foundational elements necessary for their effectiveness were not established before the introduction of the ZiG. In an effort to enforce compliance with the government’s exchange rate regulations, RBZ Governor John Mushayavanhu previously announced measures targeting supermarkets that were infringing upon these guidelines, including the potential revocation of business licenses. Notwithstanding these efforts, there remains a chronic disparity in currency exchange rates, with the ZiG experiencing significant valuation swings on the parallel market compared to the official interbank rate. Economic commentators and business leaders are increasingly alarmed by the situation. Vince Museve articulated that the value of the ZiG has strayed from its intended correlation with gold pricing and is now predominantly influenced by market perceptions and consumer confidence. “This market is mainly informal and not influenced by RBZ policies,” Museve asserted. Retailers have echoed concerns over the widening rift between formal and informal market dynamics. The Retailers Association of Zimbabwe indicated that due to ongoing foreign currency shortages and extreme volatility in the ZiG’s exchange rates, suppliers are forced to maintain dual price lists – one for local currency and the other for foreign currency. They expressed that “this situation is unsustainable,” adding that increases in prices measured in US dollars are exacerbating inflation and further driving consumers toward informal markets. Denford Mutashu, president of the Confederation of Zimbabwe Retailers, has urged for productive dialogue between the government and the business sector in order to address the persisting crisis. Despite government attempts to inject over US$100 million into the market aimed at stabilizing the currency, the ZiG was reported to be trading between ZiG35 and ZiG40 per US dollar on alternative markets yesterday, while the official interbank rate remained at ZiG13.98. Analysts express concern that the widening exchange rate gap may lead to more adverse economic behaviors, potentially worsening the economic situation further.

The economic landscape in Zimbabwe has been marred by continuous challenges, most notably currency instability. The recent introduction of the Zimbabwe Gold (ZiG) currency was intended to stabilize the economy but has been met with significant headwinds. Businesses, particularly retailers, are facing unsustainable operational conditions due to a mandated exchange rate that fails to reflect market realities. The Reserve Bank of Zimbabwe’s enforcement of this rate has led to criticisms from economists who argue that a more liberalized approach is necessary for effective currency management and economic recovery.

In conclusion, Zimbabwe’s government is at a critical juncture regarding its management of the ZiG currency amid rising pressures from businesses affected by a command exchange rate that does not align with the parallel market. Economists and industry leaders advocate for the liberalization of the exchange rate to restore stability and promote economic activity. Without addressing the fundamental issues of currency valuation and market trust, the economic crisis may deepen further, leading to greater challenges for the country’s businesses and consumers alike.

Original Source: bulawayo24.com

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