Government will enact legislation to entrench the multi-currency system, which makes both the US and Zimbabwe dollars legal tender for all local transactions for the duration of the National Development Strategy 1 (NDS1) in a development that should bolster confidence in the domestic currency.
Finance and Economic Development Minister Professor Mthuli Ncube, said this while addressing a press conference in Harare yesterday. NDS 1 is the Government’s five-year strategic economic blue-print covering the period 2021 to 2025.
He also indicated that the Government would craft legislation to support the use of the willing-buyer willing-seller exchange rate market price discovery in the setting of prices on the local market.
Prof Ncube said the Government had recently taken significant steps to stabilise the Zimbabwe dollar exchange rate as announced by President Mnangagwa and other fiscal and monetary policy measures.
He said the confidence deficit among economic agents as a result of the past hyperinflation experiences had resulted in increased demand for US dollars as a store of value.
Prof Ncube said lack of confidence and high inflation expectations had incentivised economic agents to engage in parallel market bench-marking of prices and skewed preference of US dollar for commercial transactions and forward exchange rate pricing.
By so doing they were creating a vicious cycle of increasing prices, which is self-fulfilling, and is generating higher month-to-month levels of inflation as well as fuelling adverse inflation expectations.
“Based on the above economic facts, the Government is putting in place the following additional measures to build further confidence in the economy. One, entrenching the multicurrency system into law.
“Government has clearly stated its intention of maintaining a multi-currency system based on the dual use of the US dollar and the Zimbabwe dollar in the main.
“However, the market’s lack of confidence in the multi-currency system is causing us challenges and I want to assure you that this multi-currency system is here to stay into the foreseeable future,” he said.
“And to eliminate any speculation and arbitrage-based activities, Government has decided to embed the multi-currency system and continue to use it or to make sure that the US dollar is used as a transaction currency in law for a period that includes the five years that covers the NDS 1 (National Development Strategy 1) period, so this will be in place for the entire NDS1 period.”
Prof Ncube said the interbank market exchange rate is now going to be determined by banks on a willing-buyer willing-seller basis and the utilisation in all economic transactions of this formal rate is now made mandatory by law.
While economic agents are free to price their goods in US or Zimbabwe dollars, he said the equivalence of the US dollar prices and Zimbabwe dollar prices of commodities should be strictly based on the current exchange rate as determined by the willing-buyer willing-seller rate.
Economic analyst Professor Ashok Chakravati said the policy interventions announced by Minister Ncube reflected Government’s commitment to deal decisively with issues causing economic instability.
Prof Chakravati said the willing-buyer willing-seller exchange rate system, which is determined by the interbank market, would also now be legislated to make it mandatory to benchmark prices in Zimbabwe.
“It shows the Government is sticking measures that will stabilise the currency and reduce the impact of the parallel market exchange rate. I think that is the ideal behind it and there will be other measures that will be brought about to bring stability.”
In relation to the price of fuel, Prof Ncube said over the past few months following significant pressure on global fuel prices due to global tensions, the Government has been intervening in the fuel sector in order to stabilise fuel prices.
“The actions have included the downward review of Government levies of fuel, and number two the release of fuel from the strategic fuel reserve.
“This week the Government completely removed the levy on diesel or rather brought it to zero cents and significantly dropped the levy on petrol, it’s now down to 4,7 cents. This action prevented the price of fuel from breaching the US$2 per litre mark.”
Global crude oil prices have been continuing to rise largely as a result of the Russian special military operation in Ukraine, which has seen the disruption of supplies to a number of countries that were major customers of Russia.
The interventions by Minister Ncube come as the Reserve Bank of Zimbabwe (RBZ) also announced new measures to rein in inflation and stabilise the local currency. The policy measures entail raising the bank policy rate, which determines the level of bank interest rate, to 200 percent from 80 percent previously.
RBZ Governor Dr John Mangudya yesterday confirmed that the new interest rate benchmark will apply to both new and existing bank loans under the apex bank’s hawkish monetary policy stance, which seeks to end speculative borrowing.
Other monetary measures include an increase in the minimum interest for local currency deposits to 40 percent from 12,5 percent and time deposits minimum rate from 25 percent to 80 percent per annum.
In addition, Prof Ncube said the Government was also taking action to increase the supply of maize and wheat into the market to ensure greater availability and price stability and this is being done through releases from the Strategic Grain Reserve (SGR).
In this light, he said the Government will immediately release 21 000 tonnes of wheat in July to the millers.
Prof Ncube said this will be done in terms of the pricing at the import parity price calculated at the prevailing interbank rate or the willing-buyer willing-seller rate.
“Millers have also indicated to assist the Government that they will in turn import 70 000 tonnes of wheat over a three-month period, the wheat will be sold at the import parity price converted into local currency equivalent at the ruling exchange rate,” he said.
On maize, Prof Ncube said, again the Government will immediately release 7 000 tonnes of maize which is an outstanding allocation to millers which they have already paid for but there were delays in releasing it due to some technical issues.
“But this will now be released immediately. In addition, the Government will now release a further 25 000 tonnes of maize on the back of a swap arrangement with millers because they intend to import a similar amount over time, so we will immediately handover 25 000 tonnes to the millers to satisfy the market.
“Thereafter, a further release of 27 000 tonnes of maize from the Strategic Grain Reserve will also be made at the ruling price of $75 000 per tonne plus US$90 and this US$90 per tonne is being converted at the prevailing interbank rate,” he said.
Zimbabwe National Chamber of Commerce (ZNCC) past president Mr Trust Chikohora said yesterday that there was the need for a clear roadmap to de-dollarisation so that people could plan in the medium term.
“The fact that the Government is spelling it out clearly now in Prof Ncube’s statement that the multicurrency system is here to stay throughout the period of NDS 1 to 2025 is an answer to industry’s call for a clear roadmap and for businesses and investors to be able to plan in the foreseeable future knowing what’s the currency regime will be,” he said.
“The inflationary pressures, which are global owing to the supply constraints that I have already alluded to have to be dealt with as well.
So, this release of grain, commitment to supplying grain to contain the price of bread and maize to contain the price of a mealie-meal is quite commendable because it helps us to fight inflation.”
A financial market analyst, Mr George Nhepera said: “While it’s too early to comment, the market is of the opinion that these measures are based on well-grounded research aimed at achieving their intended objective including advancing the economic and social benefit to the general members of the public and private sector.
“Then the issue to do with the removal levies for petrol is also very commendable because you are also controlling the price of fuel which as you know, if it continues to go up, it can be very inflationary.”