SINCE its introduction as the replacement for the now defunct Zimbabwe dollar (ZWL) through the 2024 Monetary Policy Statement (MPS) on April 5 2024, the Zimbabwe Gold (ZiG) has been the focus of national discussion.
The ZiG is now Zimbabwe’s legal tender for all public and private debts and is part of a multi-currency basket that includes the US dollar (USD) and South African rand, among others.
Public discussions are currently revolving around ZiG exchange rate determination and management, as well as its ability to store value and settle market transactions — purchasing all goods and services in Zimbabwe.
This week’s column, therefore, assumes paramount importance as it aims to meticulously assess the performance of the ZiG so far and delve into the likely reasons behind its weak infancy, characterised by dismal performance against the USD in the alternative (parallel) markets.
ZiG performance so far
The ZiG was officially introduced on April 5, coinciding with the unveiling of the 2024 MPS. The following chart illustrates the ZiG's performance from its market debut on April 8 to May 3.
On the first day of ZiG trading, the average parallel market exchange premium was only 3%, remarkably within the generally acceptable threshold of at most 20%.
However, during the period under review, the ZiG gained 0,1% in the official markets, from ZiG13,5616:US$1 to ZiG13,554:US$1. In the alternative (parallel) markets, the local unit witnessed a staggering 30% slump from ZiG14:us$1 to ZiG20:US$1.
- Rampaging inflation hits Old Mutual . . . giant slips to $9 billion loss after tax
- Monetary measures spur exchange rate stability: RBZ
- Zim deploys IMF windfall to horticulture
- Banker demands $21m from land developer
Keep Reading
This led to a rapid increase in parallel market premiums, from 3% to 48% in less than one month. If this trend continues, the escalating parallel market premiums will exert immense pressure on ZiG prices, potentially leading to economic instability as economic agents move to cushion against exchange rate-linked losses.
Drivers of ZiG decline
The ZiG has marginally gained in the official markets, and the gains were mainly accrued from the stellar performance of gold prices in the international markets. However, as usual, the local unit tumbled significantly in the parallel markets for reasons explained below.
Lack of public/market confidence
The Reserve Bank of Zimbabwe (RBZ) publicly indicated that the ZiG is backed by reserves totalling US$285 million, comprising holdings of 2,5 tonnes of precious metals (mainly gold) reserves worth US$185 million and hard currencies (primarily USD) amounting to US$100 million.
The Bank explained that these reserve assets provide more than three times the cover of the system's reserve money (base/high-powered money), totalling ZW$2.6 trillion or US$90 million equivalence.
This means that the Bank has adequate reserves to back up its base money (M0). Generally, M0, which is mostly currency in circulation with economic agents, is seen as the most price-sensitive component of money supply.
Anyone with an appreciation of the principles of economics would agree that M0 decides the level of liquidity in the economy and, hence, exerts a more significant influence on the general price level.
So, maintaining ‘adequate’ reserves to back M0 is thus very important in managing the exchange rate under the RBZ’s new structured currency system.
This, if true, coupled with the stellar performance of the yellow metal on international markets in recent months, would favour the ZiG.
However, it is now apparent that the ZiG risks suffering a stillbirth. It had already erased at least 30% of its value against the USD in the parallel market in the first month of operation as legal tender compared to 19,5% lost during the same period when the RTGS dollar was launched in February 2019.
More so, USD liquidity in the banking sector remains tight, the informal sector economy keeps booming, and fiscal pressures are escalating. This situation will likely sustain huge parallel market foreign exchange premiums and promote adverse rent-seeking behaviours.
But what intrigues me is that the central bank’s statistics state otherwise — pointing to ‘adequate’ reserve currency and assets to anchor available ZiG base money. Suppose the central bank’s statistics are to go by.
In that case, it likely means that the massive decline suffered by ZiG was significantly fuelled by a lack of public/market confidence and trust in the Treasury, monetary authorities, and their policies.
Inconsistent monetary policies experienced over the years have led to the loss of value of economic agents’ disposable incomes, bank deposits, saving accounts, wealth, and investments.
For instance, in less than a decade (2016-2024), economic agents in Zimbabwe were introduced to bond notes, RTGS dollar (a composite of bond notes, bond coins, mobile money balances, and RTGS balances), the Zimbabwe local dollar (ZWL), multi-currency regime (mainly USD use), gold coins, gold-backed digital coins (GBDC), and now the Zimbabwe Gold (ZiG).
Currency revaluations experienced since early 2006 that were not supported by the swift implementation of robust policy reforms always produced negative net benefits to the citizens and the economy.
In addition, frequent currency changes always significantly impact public debt, which is sine qua non of what Zimbabwe experienced with Statutory Instrument 32 (SI32) and SI142-induced legacy debts/ blocked funds. Since the turn of the new millennium, these cumulative losses have drifted public confidence in RBZ and its policies to historic lows.
Unmet market expectations
When I commented on the 2024 MPS, I clearly stated that the ZiG concept is a brilliant idea that, if its tenets are religiously followed, has the potential to break Zimbabwe’s record of repeated cycles of fiscal and monetary indiscipline. This is because it only allows for the ZiG money supply to increase at a rate proportional to the increase in asset reserve holdings.
As an economic analyst, I knew the ZiG would not be immediately accepted and used sector-wide. Yet the public, like in other regional countries, expected the ZiG to immediately buy and pay for all goods and services, particularly fuel and customs duty.
While the public’s expectations are rational, having a durably stable and widely accepted currency is almost impossible when the nation is a perennial net importer.
All income from Zimbabwe’s exports is spent on foreign goods and services. Again, partly due to its external debt distress, Zimbabwe fails to receive full support from multilateral financial institutions. This excessive reliance on imports is hurting the value of local currency and crippling the domestic industry.
Hence, the ZG’s inability to meet public expectations likely pressured it to depreciate.
But authorities must not fear this if they cultivate a strong political commitment to stay on the right course — policy consistency, comprehensive policy consultations, reforming institutional and regulatory frameworks, deepening transparency and accountability, and maintaining fiscal and monetary discipline.
If this holds, the cost of production will fall, thereby expanding domestic manufacturing, which is tantamount to import substitution.
Moreover, when coupled with a fully floating exchange rate regime and a sustainable ZiG money supply growth trajectory, the central bank will attain efficient ZiG price discovery in the foreign exchange markets. Thus eliminating prevailing excessive market pricing distortions. But until this is achieved, some goods and services like fuel, which is almost 100% sourced externally, will continue to trade exclusively in USD.
Post-MPS announcements
Post-MPS announcements by the RBZ have fuelled uncertainties around the ZiG. For instance, the governor has reportedly issued contradictory remarks in the public domain on the origins of the ZiG idea/concept, which left bookmakers with a field day, raising the odds of adverse future market expectations.
Also, it was reported that the Zimbabwe Republic Police (ZRP) arrested street money changers to contain the parallel market rates. In a similar fashion, the RBZ's Financial Intelligence Unit (FIU) announced a freeze on certain companies' bank accounts that allegedly violated exchange rate controls, including trading exclusively in USD and refusing to deal in ZiG. While these instances show the law taking its course, the timing of the move is wrong as the market may misconstrue it as equivalent to the return of price controls.
During the Gideon Gono-era price controls, the market experienced excessive shortages of essential goods on shop shelves.
These unpleasant yesteryear experiences with price controls exert immense downward pressure on the ZiG exchange rate. As I alluded to earlier, the authorities must allow the market forces of demand and supply to discover the actual market price of the ZiG. Excessive interference by the ‘visible hand’ fuels economy-wide pricing distortions.
A market-led exchange rate regime is the least costly way nations can follow to curb parallel market currency trading activities sustainably. The Bank must also revamp its communication strategy with its key stakeholders, including general citizens, to reduce market confusion and decisions made in a panic mode.
Limited education campaign
The ZiG was introduced in a short space of time. One would expect to be awarded ample time by authorities to study and understand exchange rate determination and the security features of a new currency before they accept it as a payment mode for settling market transactions. I believe that ‘access to information’ is the most potent currency one needs to withstand the destructive capabilities of today’s advanced technologies, which, if used with bad intentions, can promote the manipulation of currency exchange rates and enable massive production of counterfeit currency.
Cognizant of the preceding, I am convinced that the RBZ's educational window period provided to the transacting public was too limited.
This disproportionately disadvantages the less educated populace and individuals living in marginalised and underserved rural communities with limited access to efficient road networks and affordable and robust internet connections.
As economic agents, particularly informal sector businesses and smallholder rural farmers, fear losing their hard-earned incomes to unscrupulous intermediaries, many have become too sceptical about the ZiG.
As such, the lack of an effective and efficient ZiG educational campaign by the RBZ partly contributed to the elevated decline of ZiG experienced in the parallel market during its introduction stages.
Be that as it may, the public will probably become accustomed to the new structured currency – its exchange rate dynamics and security features over time.
What RBZ requires now is to establish conducive conditions that sustain a durably stable ZiG performing all the traditional functions of money - store of value, medium of exchange, and unit of account.
ZiG cash shortages
A fortnight ago, this column opined that while the RBZ continues to pursue a cash-lite economy in line with the second National Financial Inclusion Strategy, it should not lose track of the global 10-15% rule of thumb for currency in circulation in the economy.
This is key to ensuring increased availability of ZiG banknotes and coins, maximising the convenience of transacting with the local currency.
The ZiG notes started circulating on April 30 2024. Despite acute shortages of change in the market since the immediate transition to ZiG announced on April 5 2024 and a 25-day wait for the release of these new ZiG notes, the RBZ only availed and in limited supply ZiG1 and ZiG2 as coins and ZiG10 as banknotes.
I believe that the monetary authority should be careful about the reasons behind the commodification of ZWL banknotes. The supply of ZWL banknotes was significantly falling short of their demand.
A granular analysis of economic variables would show that the increased demand for cash in the economy substantially flows from the need to escape high taxes imposed by the Treasury on electronic transactions.
The increased demand for banknotes is also explained by the deepening informal sector activities, which are primarily cash-based.
Consequently, a parallel market exchange rate differential prevailed between ZWL banknotes and their counterpart (ZWL electronic/RTGS balances).
It remains my position that it is counterproductive for the central bank to continue to promote the prevalence of multiple local currency exchange rates, for instance, by limiting the availability of cash. This promotes corrupt and unproductive rent-seeking behaviours and round-tripping tactics. All these exacerbate market pricing distortions, adversely affecting the value of the local currency and destabilising local prices.
Weak ZiG demand
The Treasury has not announced its complementary fiscal measures to support the RBZ’s monetary policy steps. The government is generally the single largest buyer and seller of goods and services in the economy.
As such, government announcements like demanding at least 50% of corporate taxes to be settled in ZiG and requiring the payment of all essential government services like passport fees, vehicle license fees, and education and healthcare user fees in ZiG help propel the demand for the local unit.
Increased local currency demand positively affects its value against other currencies. So, until authorities start to institute fiscal measures to increase the volume of ZiG transactions in the economy, the new structured currency will likely continue to face immense depreciation pressures.
Elections, political polarisation, economic uncertainty A toxic political environment characterised by disputed results of elections due to a lack of progress in implementing political reforms has completely polarised the country. This is sustaining economic policy uncertainties and disrupting business and consumer spending plans.
Empirical evidence also shows a positive and statistically significant cross-country association between polarisation and income inequalities.
Income inequalities - uneven distribution of economic output among the population - significantly threaten inclusive human development.
Polarisation also negatively affects social capital and economic growth, particularly in developing countries like Zimbabwe.
Consequently, a highly polarised country is characterised by an unstable local currency due to increased currency substitution.
Parting shot
The ZiG has continued to fall significantly against the USD in the parallel markets. Only time will tell if authorities will be able to curtail depreciation by resisting the temptation to renege on prior policy pronouncements – increased transparency on the quantum and accountability of asset reserve holdings in the RBZ’s vaults, tight monetary policy stance, reduced quasi-fiscal operations, propelling ZiG demand, and establishment of a market-determined exchange rate regime with minimum RBZ interference in the price discovery process.
- Sibanda is an economist. He is a research associate with Zimcodd. He is a staunch advocate for inclusive and sustainable development. He writes in his personal capacity.
