The inevitable happened Tuesday when the official Zimbabwe dollar rate plunged by 66 percent on the recently launched inter-bank market. Last week the Reserve Bank announced a managed floating exchange rate, which would determine the rate of exchange. Under this system banks will be allowed to trade in foreign currency but are required to sell any excess daily forex to the Central Bank. Although the move might boost exports, it is expected prices of basic commodities will shoot through the roof.

Most banks were waiting for clarification from the Reserve Bank on how the system would function and as a result there was no trading. A few banks began trading Tuesday and as more banks join in, the currency is expected to weaken further. The Zim dollar is currently trading between 60,000 to 78,000 against the US$. The previous managed auction floors traded at around 26,000 to the US$. Analysts differ on whether the new system will work because exporters still have to remit 30 percent of their proceeds at the official auction rate.

It is highly unlikely the new system will be able to meet the foreign currency needs of the country and the black market is set to remain for some time. Either way its not good news for ordinary people as they will see prices sky-rocketing. The Consumer Council of Zimbabwe says the average shopping basket for a family of six is now said to be close to $Z10m. Most civil servants earn around Z$5m a month.

Parliamentary spokesman for Budget, Finance and Economic Planning in the MDC, Tapiwa Mashakada, says the new system will not work simply because there is not enough forex coming into the country. He says the black market rate will run away from the official rate until supply improves. This is also highly unlikely because the country is not exporting enough to meet demand.