(formerly IRIN News) Journalism from the heart of crises

Exchange rate fluctuations could hamper aid delivery

[Zimbabwe] Sky Scrapers

Humanitarian operations in Zimbabwe may be affected by a new measure aimed at reversing the local currency's slide in value against the US dollar on the parallel market.

The Reserve Bank of Zimbabwe is to begin foreign currency auctions on Monday next week, because the current system of fixed exchange rates has been overwhelmed by informal currency dealings.

Reserve Bank governor Gideon Gono was quoted as saying that the fixed exchange rate system was "inappropriate for the short-, medium- to long-term good of the country", when he announced the forex auctions in December last year. Gono said the Bank's monetary policy would aim to preserve the value of the Zimbabwe dollar (Zim $).

The parallel market exchange rate of the US dollar is around Zim $6,000 to US $1, compared to an official rate set by government of Zim $824 to US $1.

However, there is concern that aid agencies might suffer, should the auctions result in sharp fluctuations of the exchange rate, a senior official at World Vision Zimbabwe told IRIN on Thursday.

A finite amount of foreign currency will be offered for sale "to the highest bidder first, cascading down until all the foreign currency is sold", the official said. The bid average would then be the exchange rate for that month.

Speculation was rife about which way the auction bids would push the exchange rate.

"One possibility is the rate may actually go down. If the rate goes down, it means that our operations will actually be affected. If we get less local currency [in exchange for foreign currency funding] it means one way or another our operations will be affected, as it is highly unlikely that local prices [of goods and commodities] will go down. We may need to negotiate with donors and get some additional resources, depending on the magnitude of the downward drop - if it happens," the World Vision official added.

NGOs were generally concerned over the possible impact of exchange rate fluctuations on their ability to provide relief aid in Zimbabwe, one aid official noted.

Economist John Robertson told IRIN that "under the former system, the black market sellers were setting the price; under the auction system it's the buyers who set the price, as buyers come forward with bids".

The auction system could result in significantly lower rates of exchange.

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