Zimbabwe Devalues Its Quasi-Currency in FX Regime Overhaul
(Bloomberg) -- Zimbabwe’s government dropped its insistence that a quasi-currency known as bond notes are at par with the dollar as it overhauled foreign-exchange trading and effectively devalued the securities.
The measures are a step toward trying to create a new currency and stabilize Zimbabwe’s economy, which has been plunged into crisis as a shortage of foreign currency stoked the fastest increase in consumer prices in more than a decade and caused shortages of food, fuel and medicine. Zimbabwe abandoned its own currency in 2009 after inflation spiraled to 500 billion percent, allowing the use of the U.S. dollar and other units as legal tender. Bond notes were introduced in 2016.
The central bank will immediately establish an interbank foreign-exchange market in which the bond notes will be denominated as electronic money known as RTGS dollars, Governor John Mangudya said at a briefing Wednesday in the capital, Harare. While the government has previously insisted that bond notes and RTGS dollars are worth the same as U.S. dollars, the units currently trade at between 3.66 and 3.8 to the dollar respectively on the black market.
Denominating bond notes as RTGS dollars will “establish an exchange rate between the current monetary balances and foreign currency,” Mangudya said. “The new framework is set to bring certainty, predictability and functionality to the economy’s foreign-exchange market.”
The announcement amounted to an effective devaluation, Harare-based economist John Robertson said.
“He didn’t mention it by name, but they have devalued it,” he said. “We should now see a convergence of a stable rate going forward. Buyers and sellers will now need to meet and agree on a rate.”
Mangudya said that under the new system introduced on Wednesday:
- RTGS dollars would be used by all entities including the government to price goods and services
- The use of RTGS dollars would eliminate the existence of a multi-pricing system; prices should either remain at their current levels or decline “in sympathy with the stability in the exchange rate”
- The central bank has arranged “sufficient lines of credit” to enable it to maintain foreign currency to underpin the exchange rate
- Foreign currency from the interbank market will be used for foreign-payment invoices
“It is a small but key step that will support a long road of reforms needed to bring transparency and clarity to the country’s monetary system,” said Chiedza Madzima, a senior analyst at Fitch Solutions in Johannesburg.
The refusal by foreign traders to accept bond notes as legal tender resulted in payment problems for companies such as gold miners and grain millers and exacerbated shortages of raw materials. Shops also charged customers different prices depending on which unit they used to pay, offering discounts as high as 70 percent to those who used real U.S. dollars.
The central bank measures are a step toward Zimbabwe reintroducing its own currency, Secretary for Information Nick Mangwana said by phone. Finance Minister Mthuli Ncube has said he wants a new currency introduced within a year.
“The move is largely constructive as the government now officially recognizes that U.S. dollars and RTGS$ are not at parity,” Neville Mandimika, an analyst in Johannesburg at FirstRand Ltd.’s Rand Merchant Bank, said in response to emailed questions. “The introduction of a Zim dollar will be just in name, but the RTGS$ is essentially the Zim dollar.”
Ncube has given few details on plans for the new currency, beyond that the central bank was building reserves, which currently cover barely two weeks of imports. He’s also trying to restructure billions of dollars of defaulted multilateral debts so that Zimbabwe can obtain new international loans.
While a new currency is possible, it’s likely to behave the same way bond notes and RTGS dollars did, said Steve H. Hanke, a professor of applied economics and expert on hyperinflation at Johns Hopkins University in Baltimore. Both units depreciated against the dollar after their introduction.
“It would sink like a stone,” he said. “They have created such a mess with the bonds and RTGS dollars. What they should do is get this cancer out of the system.”
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