Market confidence in ZiG low: IH Securities

The ZiG’s stability is premised on controlling money supply and fiscal expenditures as well as ensuring enough foreign currency reserves to back it.
SECURITIES concern, IH Securities, says market confidence in the Zimbabwe Gold (ZiG) currency remains low despite the government’s plans for some taxes to be paid in local currency.

The ZiG debuted in April in Zimbabwe’s sixth attempt to establish a stable currency in over a decade. It replaced the Zimbabwe dollar which had lost its role as a store of value following a sharp depreciation against the United States dollar.

The ZiG’s stability is premised on controlling money supply and fiscal expenditures as well as ensuring enough foreign currency reserves to back it.

The central bank last month devalued the ZiG by 43% to ZiG24,39 per dollar from ZiG13,99 a day earlier as authorities buckled under pressure to dump the command exchange rate.

This was also accompanied by a pledge by RBZ that it would allow “greater exchange rate flexibility in line with increased demand for foreign currency in the economy”.

“Government is implementing measures to promote demand of the local unit, including mandating that a sizeable portion of taxes be paid in ZiG and strengthening mandatory licensing requirements for all businesses to have bank accounts and POS [point of sale] machines,” IH Securities said, in its latest market update.

“In our view, despite these measures, market confidence in the ZiG remains low, further exerting exchange rate pressures. Successful de-dollarisation will hinge on market sentiment and the authorities still face an uphill battle ensuring sufficient acceptance of the ZiG. We therefore anticipate that inflationary pressures will persist to year end.”

IH Securities said that as of August, broad money stock stood at ZiG46,45 billion, a growth of 20% from the ZiG38,75 billion recorded at the end of April 2024.

“There has been a steady decline in foreign currency deposits as a percentage of broad money stock from 82,2% in April to 74,8% in August 2024, reflecting increased use of the local currency,” IH Securities said.

“When the ZiG was introduced, it was backed by reserves amounting to US$285 million. According to the RBZ (Reserve Bank of Zimbabwe), reserves backing the currency amounted to US$375 million in June 2024, representing growth of 32% over the three-month period, whereas ZiG in circulation increased by 33% during the same period.”

IH Securities said the ZiG money supply had been in line with growth in reserves, which in theory should have resulted in exchange rate stability.

“However, on a monthly basis, parallel market exchange rate movement has been in tandem with money supply. This suggests that exchange rate movement is not in line with fundamentals and that there is another force exerting pressure on the exchange rate,” it said.

Currency volatility was seen in a rise in inflation with the Zimbabwe National Statistics Agency reporting that month-on-month inflation galloped to 37,2% in October 2024 from 5,8% in the prior month.

Economic analyst Tafara Mtutu told NewsDay Business that ZiG’s instability was closely linked to currency market dynamics.

“The immediate impact of the devaluation will be ZiG inflation. We have observed that Zimbabwe’s inflation largely takes from dynamics in the currency market so if the local currency depreciates, we tend to see a spike in inflation,” he said.

“We have already seen that with the October inflation statistics where for the first time ZiG inflation has gone up month-on-month by some double-digit figures. So, if they continue to devalue the currency as much as they did the first time around, we will likely continue to see ZIG inflation going up.”

Mtutu implored the government to exercise fiscal discipline and transparency, warning that unplanned expenditures exacerbated the monetary imbalance.

Financial analyst Ranga Makwata said diminishing trust in the ZiG was forcing individuals and businesses to rely more on the stable United States dollar.

“This rapid decline undermines public trust in the currency, leading businesses and individuals to increasingly prefer the more stable US dollar for transactions and savings,” he said.

He warned that rising inflation threatened the cost of essential goods and services, further eroding purchasing power.-newda