The Confederation of Zimbabwe Industries (CZI) has urged the Reserve Bank of Zimbabwe (RBZ) to establish an interbank trading platform for foreign currency that allows demand and supply to determine the exchange rate.
The RBZ currently is running the Dutch foreign currency auction system but confidence in the auction rate is low due to the huge parallel market premium, according to CZI.
In its latest macroeconomic briefing note to members, CZI called on monetary authorities to review the auction system. Part of the note read:
History has also taught us that the exchange rate cannot be legislated into a reference rate on the market, as the market will always set its own rate.
The authorities have two choices; either let the formal market determine the exchange rate using market forces or continue with controlling the formal market while letting the parallel market set the reference rate.
The fear that allowing the auction rate to depreciate will see the parallel market depreciate in turn appears not to be based on evidence, as the market premium has been shrinking with the depreciation of the official exchange rate.
It is, therefore, important that modalities for having a market-determined exchange rate be explored and acted upon, especially the need for an interbank trading platform to emerge where demand and supply of foreign currency will determine the exchange rate, rather than the auction rate being used to dictate terms.
… The economy needs a reference rate, and this rate can only be determined by market forces rather than legislation.
Last Tuesday, the RBZ set the rate at US$1:ZWL$130, against US$1:$230 on the parallel market.