Economy in good stead for stable exchange rate: RBZ

Michael Tome
Business Reporter
The RESERVE Bank of Zimbabwe (RBZ), says the economy is in good stead to support a stable exchange rate and has vowed to stay the course of a tight monetary policy stance to restore and maintain macroeconomic stability.Addressing participants at the Zimbabwe Economic Society (ZES) convention dubbed, “The quest for exchange rate and price stability: an assessment of recent policy measures, director of economic research and policy at RBZ, Dr Nebson Mupunga said the current economic fundamentals were strong enough to engender a more stable exchange rate.

He said the country’s current account and balance of payments were positive, adding the Government’s fiscal plan had been designed to contain the budget deficit at less than three percent over the past four years.

Spending far beyond the budgeted amounts, a regular occurrence prior to the coming in of the incumbent Government, was often blamed for driving inflation in the economy due to excessive liquidity.

Dr Mupunga also said the economy was projected to grow by more than 3, 8 percent owing to good performance in the tobacco and agriculture sector in general coupled with growth in the manufacturing sector’s capacity utilisation at 56 percent.

Zimbabwe’s external sector performance has also been solid after the country shipped nearly US$10 billion last year, which should ordinarily translate to strong exchange rate.

“This means that economic indicators are still strong to support a stable exchange rate, we still believe that the economy is in a healthy position to sustain a stable exchange rate,” added Dr Mupunga.

The remarks come as the central bank has been rolling out policy pronouncements, which include liberalisation of the foreign currency, to arrest exchange rate volatility and price increases.

It also refined the auction to a true Dutch System, increasing the bank policy rate from 140 percent to 150 percent and allowing retailers to retain 100 percent forex from domestic sales, among others.

On its part, the Treasury assumed all external payment obligations, allowed duty and tax-free imports of 10 basic commodities, reduced the intermediated money transfer tax while exporters’ surrender portion will be paid from the national budget.

The bank attributes the exchange rate volatility to behavioural factors at a time inflation has also been increasing and alternative value preservation instruments remain limited.

According to the central bank, the full implementation of recent stabilisation measures will go a long way in restoring demand and confidence in the local currency, stabilise the exchange rate, and inflation.

Dr Mupunga also said the central bank was confident that the newly instituted measures will yield a positive result.

“The sustained tightening of monetary policy will help further anchor inflation expectations,  and flexibility in the exchange rate will play the much-needed shock absorption role in the supply and demand dynamics of foreign currency.

“So, overall as the central bank and also I understand that the same with fiscal authorities, we are staying the course of a tight monetary policy stance to restore and maintain macroeconomic stability,” said Dr Mupunga.

Speaking at the same event, Dr Ithiel Mavesere from the University of Zimbabwe Economics Department, said responsible authorities should get back to the basics like promoting productivity to strengthen the exchange rate and pricing levels.

“Determinants of the exchange rate is what we produce, are we producing things that attract those with foreign currency to come and buy, we need to be producing enough,” said Dr Mavesere.