Question

Write about Zimbabwe Exchange rate regime and describe the change of ZImbabwe exchange rate with figures and tables?

explain the causes for exchange rate change and give suggestions on ZImbabwe exchange rate regime if necessary?

Answer 1

In Zimbabwe, the exchange rate regime has evolved from flexible towards fixed/multicurrency regime, as price stabilization and credibility of the monetary policy gained priority.7 The real effective exchange rate (RER) measures the relative price levels (domestic and foreign prices expressed in the same currency unit. In this paper, we focus on the bilateral CPI-based real exchange rate with South Africa, which is Zimbabwe’s main trading partner. It is defined as RER = e P^F/P^D where e denotes $ per South African rand, P^F is the consumer price index of South Africa and P^D is the consumer price index of Zimbabwe. Depicts the evolution of this bilateral RER with South African rand and its components for the past three decades.

Date of redenomination	Currency code	Value
1 August 2006	ZWN	1 000 ZWD
1 August 2008	ZWR	1010 ZWN = 1013 ZWD
2 February 2009	ZWL	1012 ZWR = 1022 ZWN = 1025 ZWD

All four issues of the Zimbabwean dollar experienced high rates of inflation, although it was not until the early 2000s that Zimbabwe started to experience totally unsustainable hyperinflation.

On 13 July 2007, the Zimbabwean government said that it had temporarily stopped publishing (official) inflation figures, a move that observers said was meant to draw attention away from "runaway inflation which has come to symbolise the country's unprecedented economic meltdown". In 2008, the inflation rate accelerated dramatically, from a rate in January of over 100,000% to an estimated rate of over 1,000,000% by May, and nearly 250,000,000% in July. As predicted by the quantity theory of money, this hyperinflation was linked to the Reserve Bank of Zimbabwe's choice to increase the money supply.

This research looks at the inflationary effect of currency devaluation and its contractionary effect on real output growth in Zimbabwe. The study uses quarterly data from 1990 to 2006 and utilizes the Johansen co-integration regression test and vector error correction method (VECM); and examines the short run and long run relationship between exchange rate, inflation and real output. The study finds that firstly, in both the short run and long run, fluctuations in the real exchange rate are significant on real output growth and expansionary in both periods. Secondly, the findings of the study suggest that exchange rate fluctuations are neither inflationary nor deflationary in Zimbabwe in the short run. Lastly, the result of the long run supports our hypothesis that devaluation of real exchange rate is inflationary. It implies that the weakening of domestic currency as part of the exchange rate liberalization policy is an incentive to Zimbabwean exporters and has potential economic growth gains though, in the long run, it has inflationary effects.