Zimbabwe treasury secretary rules out exchange-rate convergence

By Bloomberg

HARARE: Zimbabwe won’t allow the street rate of the ZiG to determine where its official rate should be as it isn’t driven by market fundamentals, a senior Treasury official said.

The ZiG is trading at 26.65 per dollar, compared with between 40 to 50 per dollar on the parallel market, and has already been devalued once since its debut on April 5 to narrow the gap.

“Convergence is out of the question,” said George Guvamatanga, the secretary for finance and economic development in an interview. “From a policy perspective, we have never aimed for convergence.”

The street market rate “isn’t linked to any economic fundamentals and thrives on speculation,”said Guvamatanga.

He likened any attempt to bring the rates together as similar to trying to converge an elephant and a mouse.

The formal market is estimated at between $8 billion and $10 billion and handles much “bigger transactions” in comparison to the parallel market, which is valued at $500 million, he said.

“People often give the parallel market more value than it actually has,” said Guvamatanga.

He attributed the 43% devaluation in the ZiG, short for Zimbabwe Gold, on Sept. 27 to “dislocation which was there in the market,” and not to trying to converge the rates. Exporters — which generate most of the foreign-exchange — were the most disadvantaged by the widening gap in the rates.

Under the nation’s laws, exporters surrender 25% of export earnings using the official exchange rate to the central bank.

The Treasury expects recent central bank interventions including raising interest rates to 35% from 20% and increasing lenders’ statutory reserves to prop up the currency, Guvamatanga said.

A fair ZiG exchange rate would be anything between 11 to 32 per dollar, according to Guvamatanga. “We actually expect the ZiG to strengthen.”

The local unit strengthened 0.1% to the dollar Thursday, its second gain since the devaluation, according to data compiled by Bloomberg.