‘Multi-currency system exaggerates price increases’

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THE Reserve Bank of Zimbabwe (RBZ) says the country’s currency regime is partly to blame for current price increases of goods and services.
The country is currently using the multi-currency system as it forges ahead with its five-year de-dollarisation plan.
Speaking at a Zimbabwe Economic Forum meeting this week, economic research division deputy director at the RBZ, Nebson Mupunga, said because of the current system, people were now measuring the value of their money based on the US dollar.

“This has to do with the dual currency nature of the economy because when you are running with two currencies, people try by all means to measure their value in terms of the US dollar, which is different from economies that have a mono-currency.”
Mupunga noted that in a country with a mono-currency system, if the exchange rate depreciates, prices are not quick to respond.
“You will agree with me that the rand depreciated a lot, I think from 1 to 14 and sometimes it went to
1 to 20, but the pass-through from the exchange rate depreciation in South Africa is very low because their pricing dynamics are based on the local currency.
“In our case, our pricing dynamics are benchmarked to the US dollar, so any change in the exchange rate is translated directly to prices,” he added.
With prices constantly going up in line with the exchange rate depreciation, salaries have, however, not caught up with the exchange rate, leaving people struggling to afford basic goods and services.
“The challenge is that the same scenario is not applying to salaries.
“You find that prices adjust instantly, but salaries are not adjusting in tandem with movements in the exchange rate, so in the process you find that workers suffer most,” Mupunga said.
He emphasised that having reserves, which would allow the country to have a stable exchange rate, would be ideal.
“We normally term it fully dollarised, but what we had was a hard pegged exchange rate. We had a local currency that was pegged to the US dollar on a 1 to 1 basis, that’s why people talk of the one to one, but they talk about it without acknowledging that the other was local currency and the other was US dollar,” Mupunga said.
“It was a fixed exchange rate and it worked, there was the local currency in the system, but it was just US dollar because all the deposits in the banking sector were not backed 100 percent by US dollar, which means there was also a local component, so the country was running a fixed exchange rate. Now because the exchange rate is flexible, in terms of prices it has applied, but in terms of salaries it has lagged.”
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