Zimbabwe urged to ditch 'command' exchange rate

The government of Zimbabwe is facing increasing pressure to abandon its "command" exchange rate for the Zimbabwe Gold (ZiG) currency, introduced in April, as businesses struggle to cope with currency distortions that threaten to push retailers into closure.

Retailers have warned that their businesses are becoming unsustainable due to the forced adherence to the official exchange rate. This has led many to adjust prices in ZiG to avoid further losses as the local currency continues to devalue sharply on the parallel market.

Economist Gift Mugano criticized the current approach, urging the Reserve Bank of Zimbabwe (RBZ) to allow the ZiG to freely float. "The central bank must liberalize the exchange rate," Mugano said. "We're in the midst of a storm, and while the right policies must be implemented, the necessary groundwork to make this work wasn't laid before the ZiG was launched."

In May, RBZ Governor John Mushayavanhu had announced a crackdown on supermarkets violating government regulations on the exchange rate. He also threatened to revoke the licenses of offending businesses. Despite these measures, currency distortions have persisted, with the ZiG now trading at rates far higher on the parallel market compared to the official interbank rate.

Economists and business leaders are sounding the alarm. Vince Museve described the situation as untenable, saying the value of the ZiG has become disconnected from the price of gold and is now driven by market perceptions and confidence. "This market is mainly informal and not influenced by RBZ policies," Museve said.

Political analyst Maxwell Saungweme warned that threats and arrests won't avert an economic implosion. "You cannot run the economy by statutory instruments, threats, and arrests," Saungweme said, comparing the current crisis to Zimbabwe's economic collapse in 2008, when the Zimbabwean dollar became worthless due to hyperinflation.

Retailers echoed these concerns, highlighting the growing divide between formal and informal markets. The Retailers Association of Zimbabwe reported that suppliers are maintaining dual price lists—one for local currency and another for foreign currency—due to foreign currency shortages and excessive volatility in ZiG's exchange rates.

"This situation is unsustainable," the association said, adding that price hikes in US dollar terms are contributing to inflation and driving consumers away from formal retailers to informal markets.

Denford Mutashu, president of the Confederation of Zimbabwe Retailers, called for constructive dialogue between the government and business community to address the ongoing crisis.

Despite government efforts to pump over US$100 million into the market to stabilize the currency, the ZiG was trading between ZiG35 and ZiG40 per US dollar on the alternative market as of yesterday, while the official interbank rate stood at ZiG13.98. Analysts fear the widening gap could fuel further rent-seeking behavior, deepening the economic crisis.