‘Bold measures, not tinkering can save ZiG’

THE hemorrhaging Zimbabwe Gold (ZiG) needs wholesale policy interventions, including measures to address structural deficiencies to rescue the domestic currency from total collapse, economic analysts have warned.

This comes as the fledgling domestic unit of account has suffered extensive depreciation on the parallel market, which has resulted in the more than doubling of the premium between the official and parallel market rates since April 2024.

Economists, however, disagree on whether Zimbabwe should proceed and dump the multicurrency for a domestic currency given the uneasy relationship between the US dollar and ZiG in the largely dual currency basket.

While the US dollar brings stability to prices and inflation, it is clear the currency is too strong and constrains the competitiveness of Zimbabwe’s economy and products produced in the country, while forex shortage also affects the central bank’s ability to influence desired growth.

Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mushayavangu, launched the Zimbabwe Gold (ZiG) on April 5, 2024, pledging to do everything to make the new currency attractive, stable and cut rampaging inflation.

Dr Mushayavanhu pledged to maintain a tight monetary policy stance and stay clear of quasi-fiscal operations, which caused serious volatility issues in the past, to protect the ZiG.

While ZiG managed to hold strong for just over a months, it has registered a monumental collapse on the parallel market, plunging from ZiG18/US$1 upon its introduction to about ZiG 33/US$1.

The downslide has been modest on the willing buyer willing seller interbank market where the currency has depreciated from ZiG13,55/US$1 to ZiG13,99/US$1.

However, steep depreciation on the parallel market has driven sharp increases in prices, especially in ZiG terms in an economy where local currency prices track the US dollar exchange rate.

Attempts to shore up the currency through bouts of foreign currency injections to meet importers’ needs have brought little respite for the faltering currency, which authorities say is backed by gold, other precious metals and forex reserves.

Dr Mushayavanhu said at the weekend the apex bank had injected US$64 million into the interbank market in September alone and nearly US$300 million since ZiG was launched in April.

This remains inadequate to quench its voracious forex appetite in a country that depends significantly on imports for key raw materials, machinery and some basic goods due to limited domestic capacity.

He said the bank would continue to make interventions to shore up the domestic unit, including by maintaining a tight monetary policy and keeping an eye on money supply.

“The Reserve Bank of Zimbabwe is making elaborate moves to ensure the stability of ZiG through the “Back to Basics) approach to the country’s monetary policy and execution of the bank’s mandate,” reads a statement from the bank’s corporate affairs department.

The bank said this meant it would uphold in strict terms its core mandate of ensuring price and currency stability and ensuring that the money circulating was fully backed by gold, other precious minerals and forex.

The central bank admitted the shock on the domestic currency saying it was a result of pressure building up due to growing pipeline demand not mismatched by supply.

“To cover this gap, the Reserve Bank has on 19/09/2024 injected US$40 million into the interbank market to bring the cumulative total for the month of September to US$64 million,” the central bank said, adding that this would meet all genuine importers’ needs.

ZiG’s volatility does not augur well for the Government’s plans to revert to a mono-domestic currency by 2030, as provided for in terms of the law that backs the multi-currency monetary regime.

Economists speak

It appears, going by analysts’ observations, that Zimbabwe still has significant groundwork to do before it can be ready to switch back to a stable domestic currency.

Economic Professor, Gift Mugano, said authorities needed to shelve plans to adopt a mono-currency regime until they had first addressed structural issues necessary to sustain durable stability in the domestic currency.

Prof Mugano told this publication in an interview this week that the Government should first build a strong and competitive economy, grow forex reserves enough to provide six-month cover (approx.

US$4,5 billion), work on fiscal consolidation (reduce debt to 30 percent of GDP) and reduce exchange rate premium to less than 10 percent.

He also said restoring a full domestic mono-currency required the economy to attain a current account surplus position, single-digit inflation, rein in corruption, observe strict adherence to the rule of law, build national cohesion and put in place critical enablers such as affordable road, rail and air transport, ICTs, water, sanitation, health, fuel and education.

Prof Mugano said achieving this would take some time, hence his suggestion for the country to maintain the US dollar as the anchor currency during that period.

“The challenge I give to the Government of Zimbabwe is to undertake comprehensive research focused on the need to understand why our currencies are failing and what needs to be done.

“This is critical in view of the fact that we have lost so many currencies in recent years,” he said.

His comments come as authorities have tried several policy interventions to support the domestic currency, since its introduction seven months ago, but all efforts have been in vain.

Traders, manufacturers and distributors of products all now demand payment in US dollars, amid the faltering ZiG and challenges in accessing forex on the interbank market.

Pro Mugano said Zimbabwe should also address key structural issues related to agriculture, industry, mining, trade and value addition and beneficiation.

“We need to export high-value products. Ninety-two percent of our products are raw materials, 70 percent of which are minerals and 22 percent are agriculture.

“We will never take this country forward. So, we need value addition and beneficiation. We need an industrial policy that promotes production. Part of the industrial policy instruments should be local content policy, supported by Local Content Act, supported by Local Content Regulations,” he said.

This would help the country preserve about US$4,5 billion spent on imports, which the country can produce locally, among them toothpicks, chewing gums, iron and steel, tissue and paper and selected fruits and vegetables.

“So, how do you defend your currency when you are importing such things?

“We need special economic zones, we need to ringfence our taxes to support the Industrial Development Corporation to fund industrialisation. So, these are things that need to be done in a pragmatic way,” he said.

Further, Prof Mugano said Zimbabwe also needed to mobilise sufficient reserves to back its currency.

“You can only build reserves when you are substituting imports with exports and then you can float the exchange rate. He opined that the currency exchange rate regime had elements of a “command exchange rate” system.

Price controls, Prof Mugano said, have failed in the past and a proper exchange rate regime was required to have a stable domestic currency.

He also spoke on the need to build strong institutions to combat corruption and create an environment that enables authorities to defend the domestic currency while building consensus among all citizens on how best to address challenges facing the country.

Commenting on the same issue economist, Eddie Cross, said there was no alternative to de-dollarisation.

“There is absolutely no alternative. We cannot continue to use the US dollar for local transactions. If ZiG is going to survive it must qualify for two things. The exchange rate must be established by a free open market.

“Secondly, it must be fully convertible on demand,” he said. “There is no possibility of ZiG surviving under the present circumstances,” said the former RBZ monetary policy committee member.

Cross said the country also needed to address structural issues around foreign exchange where exporters liquidate only 25 percent of their earnings and hold the rest for as long as they want.

This scenario starves the market of constant liquidity supply because what the central bank gets from export surrender is insufficient.

“Foreign currency on arrival in Zimbabwe should be converted into local currency on the open market, this is the only way this thing is going to work,” Cross said.

He said Zimbabwe should emulate what Zambia and the rest of the region have done, banning foreign currency in local transactions.-ebsinessweekl