Zimbabwe Scraps Currency Peg Three Months After Introduction

HARARE (Capital Markets in Africa) — Zimbabwe’s central bank abandoned a currency peg it introduced in March and said it would allow the rate to be set by an auction system.

The announcement represents a setback for Reserve Bank of Zimbabwe Governor John Mangudya, who unilaterally imposed the peg of 25 to the U.S. dollar against the advice of the bank’s Monetary Policy Committee, according to people familiar with the situation. The introduction of the fixed-rate further strained relations between Mangudya and Finance Minister Mthuli Ncube, who have clashed on other policy issues.

Under a system to be introduced on June 23, auctions will be held weekly, the central bank said in a statement on Wednesday. Authorized currency traders will be required to serve all importers and users of foreign currency in between auction days at the ruling market rate.

“It’s a defeat for Mangudya, but for how long it will last no one really knows,” said Tony Hawkins, an economics professor at the University of Zimbabwe.

The new system is likely to result in a narrowing of the gap between the official rate and cost of currency on the black market, which has risen to four times the peg rate. The crucial tobacco and gold sectors had campaigned against the peg as they said it was making their business nonviable. Some mines were closed.

Zimbabwe re-introduced its currency last year after scrapping it in 2009 following a bout of hyperinflation. Erratic currency policy has now contributed to an inflation rate of 786% and regular shortages of fuel, wheat and foreign exchange.

A crawling peg, which will be adjusted from time-to-time, will still be used for dealings with the government.

The bank said the auction system would be funded via an offshore facility, as well as forex liquidated by companies. The facility has $500 million in lines of credit and the African Export-Import Bank among its lenders.

Source: Bloomberg Business News