On Friday, the 5th of April 2024, the Central Bank announced a set of new monetary policy measures, along with a new currency, the Zimbabwe Gold (ZiG) which replaced the ZWL.
The RBZ governor went on to claim that the Bank has sufficient reserves to back and preserve the value of the new currency, while notably alluding that fuel will be sold in any preferred currency by the retailers since the multicurrency will be retained until 2030. The lack of enforcement on ZiG as a medium of exchange in the purchase of fuel has raised concerns on whether the RBZ has confidence in its new baby.
According to the Central Bank governor, the new currency is backed by a combination of 2.1 tonnes worth of gold, valued at a circa US$100 million, along with foreign reserves amounting to US$185 million. In a bid to preserve the currency, the Central Bank pegged the exchange rate to US$ against gold price per milligram. However, prospectively, the bank expects the exchange rate to be subject to additional fundamentals which include ZiG and US$ inflation, separately.
The new currency was introduced at a rate of ZiG13.56 per US$1.
One of the main functions of money is its ability to store value, as well as be a medium of exchange. However, under the multi-currency regime in Zimbabwe, most traders have historically firmly rejected the local currency in favour of foreign currency, particularly the informal and the fuel sector.
However, since the fuel sector is highly regulated, the government’s failure to enforce use of ZiG in this sector has stimulated speculations on whether the RBZ is sincere on its claims about reserves backing the local unit.
It is important to note that ZiG is not recognized beyond Zimbabwean jurisdiction.
Meanwhile fuel is entirely imported into Zimbabwe and thus fuel dealers need foreign currency to import.
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Therefore, the question is not mainly on why fuel dealers can-not accept zig, rather, how can the government, under use of ZiG, capacitate fuel dealers to reduce lead times, delivery lags, and ensure constant supply of fuel which is essential in the overall running of the economy.
If government is to enforce the use of ZiG by fuel dealers, it means fuel dealers will have to depend on interbank for foreign currency to import fuel, which takes time and ultimately lead to fuel shortages in most parts of the country. Alternatively, fuel dealers will opt for parallel market for foreign currency, which puts pressure on exchange rate and drive the price of fuel as well.
In all this, fuel is one of the most essential products in any economy, as shortages of it entail a halt in most economic activities.
In a bid to avoid above calamities, the government has historically avoided currency enforcement on fuel dealers, allowing them to accept a currency of choice as opposed to what happens in the formal retail space particularly food. This has nothing to do with “who runs the fuel industry", and more about the opportunity cost.
However, this decision speaks volumes on government’s capacity to stabilize the local currency through reserves. Comparatively, South Africa imports fuel mainly from Mozambique.
Nevertheless, fuel dealers in the country trade in the Rand, and easily get foreign currency from the bank just in time to meet import demands. The reason Zimbabwe can-not enforce the use of local currency in the fuel industry is therefore its inability to sustain foreign currency pressures on fuel imports using reserves.
If the RBZ is sincere on the level of reserves, then stability of local currency will be premised on easy access to foreign currency through formal banking, including for fuel dealers who would have traded in ZiG.
In this regard, the ZiG is presently susceptible to the same fate as its predecessors.
- Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — twdumah@gmail.com or tinashed@equityaxis.com, Twitter: TWDuma_
