Zimbabwe adopts new forex trading system to curb runaway inflation

2020-03-12 15:55
Zimbabwe Finance Minister Mthuli Ncube arrives at the Parliament of Zimbabwe to present the national annual budget on 14 November 2019.

Zimbabwe Finance Minister Mthuli Ncube arrives at the Parliament of Zimbabwe to present the national annual budget on 14 November 2019. (Jekesai Njikizana/AFP)

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Harare – Zimbabwe's finance minister announced on Wednesday that the country will adopt a "managed float" exchange rate system to slow the drop in the value of its currency and curb runaway inflation.

The measure is the latest in a string of efforts "to stabilise the exchange rate hence to lower inflation", finance minister Mthuli Ncube told journalists in the capital, Harare.

Zimbabwe, which suffered a devastating period of hyperinflation a decade ago, has recently seen a disconcerting return of galloping inflation as the government tries to boost the moribund economy.

READ | On brink of 'man-made' starvation, Zimbabweans struggling to cope

The country abandoned its worthless currency in 2009 to bring an end to the hyperinflation that reached 500 billion percent, but a physical lack of foreign currency was one factor holding back the economy over the past decade, marked by high unemployment and shortages of basic goods.

In February last year, Zimbabwe reintroduced its local currency and in June banned the use of the US dollar for local transactions.

Inject forex when necessary

As Ncube unveiled an electronic trading system he acknowledged that the lack of an effective trading platform had hampered efforts to control the currency as a parallel market had mushroomed.

"This platform will allow foreign exchange to be traded freely amongst banks and permit a true market exchange rate to be determined," he said.

The central bank in future will abandon stringent control of foreign exchange but continue to be a significant player in the market by providing liquidity to stabilise the exchange rate when necessary.

READ | Zimbabwe launches new currency measure

In the past, the central bank played a part in determining the exchange rate, but now its role will be to inject forex into the market when necessary to stabilise the currency.

Such a system where a central bank regularly intervenes in the market to help determine a currency's value is called a managed float.

Zimbabweans can barely keep pace with the price rises, including a 60% overnight jump in bread prices last October that rekindled fears of hyperinflation.

The annual inflation rate struck 500% in December, according to Bloomberg financial news agency.

Read more on:    zimbabwe  |  southern africa  |  economy

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