The government is set to introduce a currency board with the hopes of backing all units of domestic currency in circulation with foreign currency and reducing the skyrocketing inflation in Zimbabwe.
Ashok Chakravarti, a member of the Reserve Bank of Zimbabwe’s monetary policy committee (MPC), on Thursday said “the issue of the currency board is being looked at”.
Addressing an economic conference in the resort city of Victoria Falls, Chakravarti added that “it is being considered” to support the embattled Zimbabwean dollar.
He further stated that Zimbabwe would need about US$700 million to back the amount of local money in circulation.
According to Investopedia, a currency board is an extreme form of a pegged exchange rate. If introduced in Zimbabwe, the currency board will take away the management of the exchange rate and the money supply from RBZ.
The currency authority will, in addition to a fixed exchange rate, maintain reserves of the underlying foreign currency to back all units of domestic currency in circulation.
Below are the key takeaways listed by Investopedia about the currency board:
A currency board is an extreme form of a pegged exchange rate.
Often, this monetary authority has direct instructions to back all units of domestic currency in circulation with foreign currency.
Currency boards offer stable exchange rates, which promote trade and investment.
In a crisis, a currency board can cause substantial damage by restricting monetary policy.
Renowned American economist Steve Hanke on Friday said Zimbabwe’s inflation had surged to 487%/yr. He was, however, hopeful that the situation could be solved if the country implemented the currency board.
“In the face of surging inflation, Zimbabwe is finally considering the establishment of a currency board—14 years after I first proposed one. Today, I accurately measure inflation at 487%/yr- nearly 2.5x the official rate. A properly designed currency board would smash inflation,” he said.
Local economist Tinashe Murapata also welcomed plans for the currency board.
“It’s good news that the authorities are thinking about a currency board. Perhaps now the debate can become more technical. And discuss the how.
“A currency board is the only solution to the currency crisis. But it’s important to adhere to the spirit and letter, not just the idea,” Murapata said.
In a bid to save the embattled Zimbabwean dollar, the government yesterday suspended payment for goods priced in black-market rates.
Ministry of Finance Permanent Secretary George Guvamatanga proclaimed that all payments had been suspended for goods supplied to Government ministries, departments and agencies and possibly priced using black market exchange rates with procuring units now compelled to do due diligence on contracts and confirm that the official interbank rate is being used before payments resume.
“Such pricing framework by the suppliers of goods and services, have not only been causing inflationary pressures but also parallel market activities,” Guvamatanga said in the circular seen by Bloomberg and dated Aug. 4. The Treasury confirmed the letter.
“This has resultantly caused instability in the foreign exchange market characterised by unnecessary movements on the rate resulting in exorbitant prices being charged,” he said.
