The ZiG journey from launch

24 May, 2024 - 00:05 0 Views
The ZiG journey from launch Source: Reserve Bank of Zimbabwe

eBusiness Weekly

Dr Keen Mhlanga

Supply and demand determine the value of a currency, just as they do for any other assets.

An increase in demand for a given currency increases its value, but an increase in supply decreases its value. The exchange rate is the value of one country’s currency relative to another. For example, if USD/ZiG is trading at 13 2767, one US dollar equals 13,28 ZiG.

Exchange rates are established by foreign exchange markets and are on-going. This article will look at the primary economic indicators that show the new currency is on track for success since its introduction on April 5, 2024.

Reduced Inflation

Inflation is the general increase in the cost of goods and services. Inflationary pressures reduce the purchasing power of money. In general, countries with continuously low inflation rates will have more valuable currencies than countries with strong inflation.

In April 2024, the month-on-month inflation rate was 2,9 percent, down 2 percent from March 2024’s rate of 4,9 percent. This means prices, as measured by the all-items CPI, rose by an average of 2,9 percent between March and April 2024.

The month-on-month inflation rate for food and non-alcoholic beverages was 4,2 percent in April 2024, down 3,9 percentage points from 8,1 percent in March 2024.

The April 2024 month-on-month non-food inflation rate was 2,4 percent, down 0,6 percent from the March 2024 rate of 3 percent. The official food poverty line (FPL) for an individual in April 2024 was ZiG424,95.

Inflationary stability benefits citizens by preserving the purchasing power of the ZiG. If prices rise gradually, consumers can better plan their budgets, increasing spending and investment, which feeds the economy.

The reduction in inflation also promotes corporate growth by providing a stable, predictable environment in which to operate, resulting in additional job possibilities or the opportunity to explore new products and services.

Low inflation boosts Zimbabwe’s competitiveness in the global market. When the economy is stable and predictable, other countries are more likely to invest in our home country.

This can attract more foreign investment, lead to better trade relationships and strengthen the entire economy.

The rule of thumb is that inflation and interest rates are inversely related. Higher inflation reduces the value of a currency, but higher interest rates raise its worth.

In contrast, reduced inflation increases the value of a currency, whereas lower interest rates make a currency less appealing to investors, lowering its value.

Currency backing

All currencies are backed by resources, these resources include both physical items and human services that are traded for value.

The underlying resources that underpin a currency determine its issuance and circulation capacity. Currency organisers must employ core resources to mitigate the negative effects of national currency shortages.

Gold as a primary resource is crucial to our currency and has a significant impact on its effectiveness.
Zimbabwe now has US$80 million worth of ZiG in circulation, backed by US$100 million in cash and US$185 million in gold reserves.

This means there is US$ 205 million worth of ZiG that is not being exploited. It limits the government and the central bank to induce price inflation through the excessive issuing of paper currency. Leaving this reserve has made the currency more stable.

It is important not to use up all of the currency backing to maintain and reserve its value. Fiat money’s value can depreciate due to inflation and in certain situations it can become worthless due to hyperinflation. This is because it is not backed by an asset and hence lacks inherent worth to maintain its market position.

Purchasing power

Local production activities contribute value to the country’s economy, correspondingly increased purchasing power increases expenditure. The surge in supply and demand drives import and export, resulting in increased international commerce volumes.

Purchasing power is the value of a currency expressed in terms of the number of goods or services that one unit of money can buy.

It can weaken over time due to inflation. That is because rising prices effectively decrease the number of goods or services that one unit of money can buy.

On April 4, 2024, the ZWL last traded at 26 412,7211 against the USD. The ZiG:ZWL conversion factor of 2 498,7242 was effective on April 8, 2024, during the 21-day transition period.

When we compare ZWL earnings to ZiG earnings without an increment, we can see that ZiG is purchasing more than ZWL, indicating that it has a greater buying power. This is evident in supermarkets, where sales have increased dramatically and money circulates openly, and overall retail activity is relatively solid.

Local economy

Currency strength in the home economy is defined as its purchasing power over locally produced goods and services. When the economy stagnates, the central bank can lower interest rates to lessen currency strength. Lower borrowing costs boost production, and the economy grows.

Citizens’ increasing incomes and earnings translate into increased spending and consumer demand, resulting in consumer price inflation and higher corporate profits for corporations.

Expansionary encouragement of domestic economic activity allows the currency strength to grow organically. ZiG has a skewed strength on local products and the government has promoted the usage of the currency massively by making sure part payments are done using the local currency.

When a currency is strong, it is less expensive to buy products and services from a country with a weaker currency.

Conversely, demand for products and services in a country with a strong currency would normally fall because those goods and services are more expensive in countries with weaker currencies.

On a broader level, a strong currency for an extended period of time may lead to businesses going overseas to cut the cost of their goods and services in other nations.

Socio-economic importance

Price stability is critical in both economic and social contexts. If the general price level remains relatively consistent, it is simple to discern changes in relative prices, or the pricing of goods in respect to one another.

Price variations then accurately reflect whether a commodity has grown scarcer or more abundant, as well as whether demand has increased or decreased. These pricing signals have a significant impact on firm and household production and consumption decisions.

The increase and fall of goods prices direct scarce economic resources to areas where demand is great.

Stable currency is critical to the operation of the price mechanism. The best contribution monetary policy can make to long-term economic growth and high employment levels is to maintain price stability, which helps companies and consumers plan with confidence.

When inflation is high, lenders frequently demand surcharges on interest rates to compensate for uncertainty about the magnitude of future depreciation.

When prices are essentially steady, however, the inflation risk premium is modest, resulting in lower interest rates overall. Lower interest rates boost investment, economic growth, and job creation.

Stable money protects the real worth of income and savings, preventing an arbitrary redistribution of wealth due to inflation. Inflation, as experience has shown, has a disproportionately damaging impact on the poorest segments of the community.

Fixed payment recipients, such as pensions or benefits, are frequently at a disadvantage because these payments are rarely or not at all adjusted for depreciation. Steady currency protects those who are frequently unable to avoid the effects of inflation.

In the course of time, stable money benefits everyone. In conclusion, persistent and potentially rampant inflation threatens the market economy’s foundations on numerous fronts.

It exacerbates societal tensions over income distribution and, in the long term, leads to lost growth and employment opportunities. It is therefore true that the sailing through of the ZiG benefits everyone.

Dr Keen Mhlanga is an investment advisor with high skills in finance. He is the executive chairman of FinKing Financial Advisory. Send your feedback to [email protected], contact him on 0777597526.

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