allAfrica.com: Zimbabwe: Gono 'Frees' Forex Trade (Page 1 of 2)

THE Reserve Bank of Zimbabwe has liberalised the foreign currency market by introducing an interbank trading system that will result in exchange rates being determined by the forces of supply and demand to encourage inflows into the formal market.

Individuals, embassies and other institutions will now sell their foreign currency to banks and other authorised dealers on a willing-buyer/willing-seller basis.

Presenting the 2008 First Quarter Monetary Policy Statement in Harare yesterday, RBZ Governor Dr Gideon Gono announced key measures to guide foreign currency trading, set to subdue activity on the parallel market.

The measures were also in response to requests by the Bankers' Association of Zimbabwe to liberalise the exchange rate system.

"Freeing the exchange rate system by introducing an interbank foreign exchange market in order to formalise the trading of foreign exchange away from the informal market to the formal market, this measure will go a long way in addressing many apparent distortions in the pricing system in the economy while at the same time addressing the shortages of goods and services in the economy," said a memo to Dr Gono signed by BAZ president Dr John Mangudya.

The willing-buyer/willing-seller concept, said BAZ, would also reduce "unnecessary" demand for foreign currency in the market while creating an efficient pricing system.

Banks and other authorised dealers will now display their average buying and selling price each business day and will on-sell their foreign exchange to the Reserve Bank at the going interbank rate, leaving them with a float of not more than US$100 000.

This strategy is meant to rebuild the country's strategic reserves position.

Exporters will now dispose of their surrender requirements to the central bank at the interbank rate while surrender levels, previously at 35 percent, will be determined by the rate at which exporters grow their exports.

For instance, a 10 percent growth will reduce the surrender level to 25 percent while a 30 percent rise in exports will see exporters retaining 95 percent of their earnings.

Retention levels will now be held in corporate Foreign Currency Accounts for a maximum of 21 days.

Under the twinning willing-buyer/willing-seller arrangement, authorised dealers will match sellers with buyers, guided by a priority list that will see food production, spare parts, fertilizers and other related imports being allocated 35 percent of available foreign currency while other critical imports will receive varying amounts based on the list.

"In order to significantly move the economy towards stability, increased capacity utilisation, availability of basic commodities and, hence, reduced and declining inflationary pressures, it has become necessary that the pricing and allocative frameworks in the foreign exchange market be reformed in a manner that guarantees viability for all generators of foreign exchange, whilst at the same time ensuring availability and affordability of this resource to users of foreign currency, particularly the non-exporting producers of basic goods and services," said Dr Gono.

This will also help strengthen the Zimbabwe dollar as overall export levels and other foreign currency levels improve.

The central bank chief also spoke passionately about the global food crisis and its effects back home, saying strategies would be employed to boost production.

"Most importantly, the strongest lesson for Zimbabwe is that now is the time to swiftly act against the ravaging global menace of hunger so as to lay a credible foundation for lasting macro-economic stability and internal cohesion of our nation," said Dr Gono.

In this regard, the lifespan of the Agricultural Sector Productivity Enhancement Facility will be extended to the 2008 summer cropping season while the modified Basic Commodities Supply Side Intervention Facility will also be extended to December.

The latter now incorporates Upfront Social Front Pacts between the central bank and beneficiaries to ensure effective deployment of funds.

This comes in the wake of reports that some firms had previously channelled the funds to speculative deals, thus defeating the facility's purpose.

Furthermore, Dr Gono introduced a $300 trillion Strategic Products Price Controls Mitigation Fund to cushion firms against the effects of price controls.

Producers of such selected products as bread, sugar, cooking oil, stockfeeds and cement, among others, will get financial assistance to make up for the "genuine" adverse effects of price controls and delays in the approval of justified price reviews.

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