‘Exchange rate biggest risk to ZiG sustainability’, CZI

LIMITED access to foreign currency on the interbank market and inadequate policy measures to support the Zimbabwe Gold (ZiG) exchange rate stability pose the biggest risk to the sustainability and wider use of the country’s new domestic currency, economic analysts and industrialists have warned.

This comes after the Confederation of Zimbabwe Industries (CZI) noted in its latest update on currency and inflation developments that there was a marginal increase in monthly inflation in tandem with the slight depreciation in the Zimbabwe Gold (ZiG) official exchange rate.

Expectations were high that Finance, Economic Development and Investment Promotion Minister, Professor Mthuli Ncube, would announce a slew of policy measures in his 2024 mid-term budget review to address some of the currency issues besetting the domestic economy.

Economic analysts said durable stability could only be achieved if policy measures were put in place to guarantee market-driven exchange rates and eliminate distortions in the market.

The month-on-month ZiG inflation has been under control since April 2024, despite moving from deflation in roughly the past three months of its existence. Month-on-month ZiG inflation increased to 0.0 percent in June 2024 from -2.4 percent recorded in May 2024, gaining 2.4 percentage points.

“Inflation for the local currency in Zimbabwe largely mirrors the exchange rate, and this is still true with respect to ZiG.

“The official exchange rate for ZiG depreciated by 1 percent on average between the months of April 2024 and June 2024 from 13,56 to 13,70 by end of June.

“The depreciation in the local currency can explain the movement of the inflation rate from -2,4 percent in May to 0 percent in June 2024.

“This implies that exchange rate management remains the main avenue through which inflation can be managed,” CZI noted.

However, CZI said, while the official exchange rate had remained largely stable, the main challenge was for businesses to get (adequate) access to foreign currency at the willing buyer-willing seller platform for genuine import requirements.

There is not enough foreign currency to meet the demand from business, as it is largely the foreign currency from the surrender requirements that is available for sale.

“There is largely one willing seller; the Government, with several willing buyers. There is a need to create demand for the ZiG, for example through the payment of taxes so that those holding US dollars need to liquidate their US dollar positions to fulfill statutory obligations,” CZI noted.

The industrial lobby said the 2024 Monetary Policy Statement had envisaged this and proposed that strengthening and at the same time creating the demand for the ZiG requires making it mandatory for companies to pay at least 50 percent of their Quarterly Payments Dates (QPDs) in ZiG.

This could not be implemented soon after the delayed MPS, delivered in April instead of the traditional dates around February each year, as the current tax structure was a creation of Parliamentary statute.

“This would see at least some holders of US dollars becoming willing sellers to those willing buyers with ZiG and help enhance access to US dollars.

“It is hoped that the necessary legislative reforms needed to make this become law will be fast-tracked as currently there are no incentives for any holder of US dollars to sell it for ZiG,” CZI noted.

ZiG inflation has generally been under control over three months since its launch. This is largely attributed to a stable ZiG exchange rate at both the official and parallel markets.

“This means that exchange rate management remains the key determinant of ability to keep inflation stable.

“The current situation on the ground where there is unmet USD demand is a threat to exchange rate stability and hence inflation.

“Thus, the ability to create a stable market clearing willing buyer willing seller-determined exchange rate defines the inflation outlook,” CZI said.

Economist and Small and Medium Enterprises Association of Zimbabwe (SMEAZ) chief executive officer, Farai Mutambanengwe, said little would change in terms of stability and reducing inflation without a market-determined exchange rate.

According to Mutambanengwe, the root of exchange rate volatility in the past was an inefficient and under-supplied forex market.

“Without that, we are always going to have distortions, we are always going to have inflation, especially if the Government starts paying suppliers (in local currency).

“So far, the main thing controlling the exchange rate is the Government not paying suppliers (in ZiG). But the moment they started paying them, the exchange rate started to move,” he said.

“Unless we have a proper market-determined exchange rate and a proper market for foreign currency where all players; both buyers and sellers participate, nothing changes.

“Right now the market only has the Reserve Bank of Zimbabwe as the only seller.

“Even then, they release far little foreign currency into the market, so until those issues are resolved, we will always get an exchange rate that runs each time the Government tries to pay suppliers (in ZiG),” he said.

But Persistence Gwanyanya, an economist and member of the central bank’s monetary policy committee said there had been moderate exchange rate stability since the new currency was introduced in April this year.

ZiG replaced the inflation-weary and volatile Zimbabwe dollar on April 5, 2024. It was introduced at a starting exchange rate of 13,56 to the greenback.

He said the relative stability of the ZiG, which is backed by precious metals (mainly gold) and forex reserves, was a result of judicious management of liquidity and responsible management of the fiscus.

He said the Government had tweaked its payment modalities to contractors, paying largely in forex over a much longer payment period while contractors had to secure their own capital to undertake key projects.

“The stability is largely a reflection of the functionality of the ZiG but also judicious management of the fiscus and monetary affairs of the country.

“The challenge of payment of contractors prior to the ZiG was a big challenge that was driving exchange rate volatility but it is not worth complimenting Treasury for that continued innovation as regards sustainable ways of paying key contractors for our major roads rehab.

“The contractors are having to bring in their own finance, which is mostly medium to long-term finance and thus mitigating against the possible effect of payments of these contractors on stability.

“Have you asked yourself why, despite what could be more aggression on (public) infrastructure projects, we remain with moderate stability?

“If it was in the past, how would you have expected the market to react to the infrastructure project. You would have expected the markets to run wild, isn’t it?” Gwanyanya said.

The innovation, he stressed, entailed contractors sourcing their own funding to finance projects and getting paid over a period of time, for instance 3-5 years, which meant limited inflows of excess local currency liquidity into the economy.

Gwanyanya said expectations were high Treasury would introduce measures in the mid-term budget to bolster ZiG demand, although he noted the challenge of limited forex supply to the interbank due to structural issues, especially use of forex in domestic transactions, which entitles forex holders to keep 75 percent of the commodity without mandatory liquidation requirement.-ebusinessweekly