ZiG holding its own and gaining credibility

It has now been two months since the ZiG was introduced and the old Zimbabwe dollar killed off, with no one really interested in a major funeral, and the stability of the new local currency is becoming entrenched.

The Reserve Bank of Zimbabwe, backed by the Ministry of Finance, Economic Development and Investment Promotion, appears to have won the battle over money supply.

Liquidity is now tight, meaning the taps are off, with FBC bank in its latest report seeing this tight liquidity as restraining consumer demand.

That does not seem a bad idea. For far too long hoping for economic growth through growing consumer demand has been a serious problem and has led to a lot of heartbreak and mess. What little consumer credit is around, and Axia appears to now be the leader in this regard through its range of brands, is purely in US dollars.

However, that tight liquidity, coupled with other measures such as a serious assault on the black market, has maintained the exchange rate for two months, There have been slight rises and falls, nothing more than a percent or so in each direction, as the bankers set their daily rates. That implies that there is a strong degree of balance between what foreign currency is available for sale and the business demand by non-petroleum importers.

A glance around supermarkets sees a decrease in ranges of products, basically the foreign imports moving off the shelves and more local brands, even when these are just packing brands or brands where the imported product has been packed for a local company before import.

The cut back in the imported products has seen some of the shortages of semi-luxuries that were common in the days before the 1990s ESAP opened doors with the local product, even with imported raw materials, being readily available.

Again this is positive economically, although some of the better off might object. The tuckshops and vendors still have supplies, but they still operate in a pure US dollar system.

In several cases new local manufacturers have been active. To take just one example in the wheat processing trade there are at least two new producers of biscuits and a new major baker giving the triumvirate some competition and hopefully breaking up what sometimes appeared to be the edge of a potential cartel.

A more serious sea change can be seen in the stock exchanges, where economic fundamentals have not always driven prices.

During last month there was a modest rise in the index for the Zimbabwe Stock Exchange, and the market capitalisation of that exchange, and a modest fall in market capitalisation of the Victoria Falls Stock Exchange.

The ZSE all share index fell slighting during the three weeks of April after the introduction of the ZiG and the reset of the index to 100.

By the end of the month it was down very slightly at 98,83, nothing dramatic but a sign of slight nervousness and perhaps a desire by those who had been playing the system during the first quarter freefall of the Zimbabwe dollar to grab their profits or cut their losses.

Last month saw the ZSE all-share index creep up to 102,14, a rise of 3,35 percent meaning more investors were wanting to come in, at least for some shares, than were wanting to pull out.

The VFSE, which because it denominates in US dollars and requires buyers to have foreign currency, as well as sellers getting foreign currency, has always had the secondary function of a legal way of buying US dollar assets and being able to do a bit better than holding money in a FCA account with the banker taking their monthly charges.

The VFSE all share index had ended April on 99.61, so the first three weeks of ZiG had had almost zero effect on the US dollar share prices. The exchange seemed to remain disconnected from the local currency economy.

But last month saw major movement, a drop in the index of 4,23 percent to 95,61. There were no new counters, which have driven previous drops as shares were shoved up in value shortly before being transferred from a local currency to the foreign currency exchange, and then returning to a realistic level as the premium the market generated for the transfer evaporated.

So the fall in the VFSE was driven both by market expectations of profits and the like, and by fewer share buyers wanting a safe haven for their money.

To a degree it appears as though the VFSE is moving from a foreign currency investment medium towards a proper market valuation of shares.

The rise in the ZSE index and the fall in the VFSE index almost mirrored each other, again suggesting that there is less speculation on exchange rates and more attention on the underlying strength of the quoted companies.

We probably have some distance to go but at least the investing public appears to be regarding the ZiG stability as something a bit more permanent that previous efforts to stabilise the local currency.

The delay in introducing the ZiG while allowing the banks to set exchange rates without Reserve Bank or Government intervention for three months, while at the same time making sure money supply taps were all discovered and then closed, did wipe out the excess local currency liquidity, and then possibly a bit more considering the tightness of local currency.

Corporate tax payers have obviously been stocking up on ZiG to pay their second quarter tax bills, and even pure exporters have to pay half in ZiG, but there is likely to be more demand as some of those who held back on the stocking up have to make last minute sales of US dollars to meet their Zimra demands, so the ZiG could even strengthen slightly.

The Reserve Bank has, wisely, been very careful about feeding ZiG banknotes into the economy. It talked about “drip feeding” but the ZiG10 notes and coins are hardly circulating very much.

In one weird area, kombi and bus fares, the ZiG10 note is sometimes acceptable as a 50UScent token, although that should be in coins totally around ZiG7, but this does not seem to be a blackmarket rate.

The kombis that take ZiG10 accept it for a 50c fare and give it as change, but there are very few passengers with ZiG notes and so very few ZiG10 change.

Until petroleum fuels are imported using foreign currency sourced from banks, rather than the diaspora-fed free funds market, public transport is likely to be consolidated as a pure US dollar market, with the old 50c fares now US$1.

Supermarkets are slightly keener on ZiG as small change for buyers using US dollar banknotes, but again the supply is low.

ZiG purchases are almost all by card or phone and the cashless society has hardly taken a dent in the local currency economy.

That makes the Reserve Bank care important. We perhaps need to think for a while as to whether we actually need notes and coins, beyond tokens for small change in the US dollar transactions.

The swathe of arrests of blackmarket street dealers, and the lack of bail for these dealers while they still await trial has meant that there are no dealers wandering around with bundles of ZiG10 notes, and the removal of the street dealing appears to have tamed the black market significantly.

There are still the private deals, some involving a dealer others involving close acquaintances, but a lot less than before.

The Financial Intelligence Unit is no doubt more aware of what is happening at the upper levels of the black market, since those deals do mean at least one electronic transfer of local currency even if the US dollar side is in banknotes.

To some degree the way the Government and many private companies have decided to pay at least part of salaries in US dollars has diminished the need for many to use the black market to buy US dollars for fuel and rent, and the extreme pressure on schools, including private schools, to accept ZiG for fees has dried up another demand for foreign currency.

Blackmarket dealers were driving exchange rates, regardless of underlying value and fundamentals, in order to make a profit.

The business had large margins between buy and sell rates, and to some extent also relied on a falling value of local currency to at least cope with miscalculations on value and often to add to profit.

So far the measures by the authorities have kept the ZiG stable, and this is in a free-market at least for buying foreign currency for imports, and they need to maintain their pressure, and their watchfulness.

Most important they need to make sure there are no taps even dripping with money supply, and that probably means keeping the ZiG higher value notes in store for a bit longer.-ebusinessweekly