Zimbabwe scraps currency peg

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Zimbabwe scrapped the peg between its quasi-currency bond note and the US dollar, its central bank governor said, potentially paving the way for its official currency exchange rate to slide sharply to match street value.

Central Bank Governor John Mangudya said surrogate bond notes would trade in a managed float against the US dollar and other foreign currencies in a new foreign exchange interbank market launched on Wednesday.

The removal of this official peg can be a dry run for eventual re-introduction of a Zimbabwean dollar currency, which the finance minister said will happen within 12 months.

The southern African nation adopted the US dollar after dumping its hyper-inflation-hit currency in 2009. It is struggling with a shortage of cash dollars, leading to prices on imported goods spiralling.

A sharp increase in the price of fuel together with broader economic difficulties last month led to violent protests were met by a security crackdown.

Mangudya also ditched the 1:1 peg between the greenback and electronic dollars, known as Real Time Gross Settlement dollars.

“We are using what is known in economics as ‘managed floating’ on a willing buyer, willing seller basis,” he said, suggesting the central bank will try to control the slide in the exchange rate.

Mangudya, who said the country would continue using multiple currencies like sterling and South Africa’s rand, added importers would now buy dollars at rates set by the interbank market.

Businesses and miners have been lobbying the central bank since last year to float bond notes and electronic dollars.

Zimbabwe has maintained a one-to-one pegged exchange rate between bond notes, launched in 2016, and the dollar even though the greenback and other currencies fetch high premiums when exchanged for the notes. Bond notes are used for day-to-day transactions in shops and elsewhere.

Harare-based economist Ashok Chakravarti said businesses buying dollars on the black market were charging higher prices and fanning inflation which reached 57% in January.

“This system will stop that completely because you will have a transparent interbank rate used by the market and importers to price their goods,” said Chakravarti.

Businesses charge more for bond notes and offer discounts to those paying in dollars.

On Wednesday, $1 fetched up to 3.50 bond notes on the street and more for electronic dollars, reflecting the ongoing shortage of dollars and people’s desire to trade out of cheapening bond notes and into more reliable currency.

When the bond note was introduced, dollar deposits in the electronic banking system started losing  value.