ZiG denominated instrument slated for August

The Reserve Bank of Zimbabwe is expected to release the ZiG denominated instrument born out of outstanding auction allotments in August this year and against the initial pronouncements, it will be tradeable.

This comes as business and industry are crippled by locked working capital and small businesses are saying they are on the brink of losing business as they might fail to recover lost market share due to the locked funds.

The RBZ Governor, Dr John Mushayavanhu, in his April 2024 Monetary Policy Statement said;
“Following the establishment of a refined interbank foreign exchange market, all outstanding auction allotments will be converted into ZiG and refunded to recipients at the current interbank exchange rate.

“This will allow the new system to start on a clean slate using the interbank foreign exchange system.

“The refund will entail conversion of all outstanding auction allotments into a two-year ZiG denominated instrument at an interest rate of 7,5 percent per annum.

“All outstanding payments for foreign exchange purchased by Treasury under the 25 percent surrender requirement will be converted to a ZiG denominated instrument with a tenor of one year at an interest rate of 7,5 percent per annum.”

In an interview the Zimbabwe National Chamber of Commerce former president, Mike Kamungeremu, said the RBZ said the ZiG paper is not yet but the bank said is expected next month.

“That (ZiG) paper is not yet out, and it is one of the issues we raised at our congress, and we got a formal response from the RBZ that the paper will be out sometime in August or thereabout,” he said.

Kamungeremu also said the central bank agreed to their proposal that the paper should be tradable in order to free funds.

“What we welcomed is that against the previous communication that the paper will be non-negotiable, they took our proposal that the paper should be tradable when a business is in dire need of capital, which is a very welcome development to business,” he added.

The RBZ Governor in a telephone interview did not confirm on the date of release but said the paper will be coming out soon, but confirmed that the paper will be tradeable.

“ZiG paper for unallocated auction funds will be issued shortly and as the RBZ we cannot stop trading in the paper by market players who want to trade it,” Dr Mushayavanhu said.

Small to Medium Enterprises Association of Zimbabwe (SMEAZ) president Farai Mutambanengwe said most of their members did not use the auction, but those that did were heavily affected as they were funds for immediate use.

“Well, for our SMEs, most of them were not really participating in the auction as there were just a few that were actually big enough to participate in the auction.

“But obviously, it becomes very disruptive because a lot of the money that would have been placed on the auction would have been for immediate needs,” he said.

He added that even if the money was for capital expenditure, the fact that they actually have something in process, they would be expecting that transactions will be settled and be able to go on with your business.

“It is just money that has been confiscated, and now it is also taking such a long time to resolve the issue.

We have had this before when we had the legacy debt issue. So, it is very disruptive,” Mutambanengwe added.

Analyst Tafara Mtutu believes the ZiG paper by being denominated in local currency already faces a problem of acceptance before it even hits the market.

“That one is a challenge because ZiG, although it has been stable since it was introduced, it still has a lot to do in terms of getting confidence levels back up. That is the first thing, but the fact that it’s not yet out right now, it has been affecting many businesses that need that money, and those that needed that money,” Mtutu said.

As observed with instruments of a similar nature, the USD treasury bonds, which were issued to companies that were owed by the Government in 2019 when the country changed from USD to ZWL.

Though that paper is in a stronger currency than ZiG, people do not have confidence in the instrument and as it has been trading at a discount depending on the maturity of the treasury bill. Analysts think it will not be any better with this ZiG paper.

On the paper being tradeable, Mutambanengwe said, the fact that it is now made tradable and so on, it is not really what that money was purposed for.

“If someone wanted to go into the money market, they would have gone and purchased treasury bills, because that is what they want to do.

“But if I am going and putting money, expecting to buy foreign currency to make my business continue to work, and then I now have to get treasury bills or some sort of paper, which I now have to trade, obviously that is completely disruptive to business,” he weighed in.

Mtutu added that, if the paper is going to be tradable, it will free up some much needed capital for those with locked funds.

“If it is going to trade and if anyone is going to be incentivised to buy that paper, there will have to be a huge haircut.

“So, if you have a paper with, maybe 100 000 ZiG for example, you might have to settle for something like even 60 000 ZiG in actual currency. I think they are going to trade at steep discounts,” Mtutu said.

Mutambanengwe said, “It being tradable might mean that people can liquidate faster, but it certainly does not mitigate the losses that have been incurred, both in terms of monetary value as well as in terms of time.”

The paper being tradeable will free up capital, but the choice is to either keep holding on to it and have no cash flows at all, or to sell it at a huge haircut and then you get some of your cash flows back and keep your business running.-ebusinessweekly