eBusiness Weekly
Misheck Ugaro
Launched on April 5, 2024 amid long awaited anticipation following the delayed announcement of the Monetary Policy Statement, the new currency called the Zimbabwe Gold (ZIG) was introduced by the incoming Governor of the Reserve Bank of Zimbabwe, Dr John Mushayavanhu or as I prefer calling him J2 following his predecessor of the same name’s sake.
Many questions had been in the minds of market players and some of these included:
Will there be a new currency?
If so what may it be called?
How different will the new currency be from all the past issuances that included:
Bearer Cheques
Bond notes
Zimbabwe Dollar
Following market talks of a structured currency, what is this new animal?
If previous currencies failed to perform, why should this one be different?
Can we trust the authorities to stick to their word?
The new Governor launched the new currency with an exchange rate set as per the guiding principle announced in the statement:
The starting exchange rate shall be determined by the prevailing closing interbank exchange rate as at April 5 and the London PM Fix price of gold as at April 4, 2024.
The intervening exchange rate shall be determined by the inflation differential between ZiG and USD inflation rates and the movement in the price of the basket of precious minerals held as reserves. The weights will be determined by the composition of reserve assets.
The opening exchange rate was therefore determined to be 13,5616 and thereafter the authorities have left the rate to the market workings on a willing buyer willing seller basis (WBWS).
That also means the parallel market would be free to play. It opened with a rate of ZiG 20 to the USD showing a premium of 47 percent.
So, what has happened over the last two weeks following the launch of the structured currency? But before narrating the unit’s performance, we may explain the fundamentals upon which the currency is based.
As a structured currency, the ZiG is supported by the nation’s reserves held with the Central Bank. A day before the unit’s launch, the new governor presented to the market good optics in the media by showing the gold reserves in the volt of the bank accompanied by the State President, His Excellency Dr E D Mnangagwa. This was an unprecedented action showcasing the transparency that is essential to build market confidence.
On the 5th, being the day of the launch, the governor revealed that the nation holds a total of 2,5 tonnes of gold in addition to US$100 million in cash as reserves. This again is unprecedented. Hitherto the nation had no idea of the amounts of reserves held.
Given this initial step, the governor then made the following very critical statements:
ZiG shall at all times be anchored and fully backed by a composite basket of reserves comprising foreign currency and precious metals (mainly gold), received by the Reserve Bank as part of in-kind royalties and kept in the vaults of the Bank.
Foreign currency balances will be accumulated through market purchases from the 25 percent surrender requirements as well as sale of some precious metals received as royalties.
As at April 5, 2024, the Bank’s reserve asset holdings comprise of US$ 100 million in cash and 2,522 kg of gold (worth US$185 million) to back the entire local currency component of reserve money which currently stands at ZW$2,6 trillion requiring full (100 percent) cover of gold and cash reserves amounting to US$90 million.
The total amount of gold and cash reserve holdings of US$285 million represents more than three times cover for the ZiG currency being issued.
It is the two statements above that the nation must hold the authorities accountable and these will address all the questions as highlighted earlier above.
Extreme sceptics have rallied public opinion claiming that the ZiG will not work because it is not different from all the previous currencies and that money supply will be allowed to rise ahead of the reserves held.
They have posited that as an example, the export retentions of 25 percent represent automatic money printing of ZiG in order to settle the retentions. They have posited that the country currently exports about US$7,5 billion and a quarter of this represents US$1,9 billion worth of ZiG as new money thereby automatically exceeding the current reserves.
Unfortunately, this is misguided analysis of the current static position of the country’s reserves against a dynamic economic growth situation.
This view conveniently ignores the fact that the same 25 percent retention also goes into the reserves amounts thereby neutralising the impact of the new money.
Perhaps at this juncture it is important to highlight that in fact all the countries around Zimbabwe retain 100 percent of all exports! It is in fact a misnomer that Zimbabwe only retains 25 percent of exports.
This argument therefore falls flat as it ignores the double effect of the retained amounts against the impact of reserves. The governor clearly states as follows:
The Bank will use 50 percent of the foreign currency proceeds from surrender requirements for strategic interventions in the foreign exchange interbank market.
The remaining foreign currency will be available to satisfy the Government’s foreign currency obligations in exchange for ZiG and to build foreign exchange reserves for the Reserve Bank.
In fact, the retentions are adequate to cover the purposes above and growing exports means growing reserves as well hence the room for increasing ZiG holding opens up.
The economic fundamentals are dynamic and cannot be based on the current static position of the nation. This is a fundamental flaw on the argument that retentions will result in increasing unbacked ZIG.
Now we can come to the performance of the new currency since its launch. The most interesting observation is the shift of demand from the tuck-shops to the retail shops using ZIG.
Speaking with the retailers, it is evidenced that following the payment of the civil servant salaries, they have faced a significant rise in sales in ZiG and they have had to increase the frequency of shelf refills.
Demand of basic goods such as cooking oil, sugar, maize meal, salt and soap has shifted from tuck shops into the retail shops using ZiG.
This signifies a shift in demand from USD to goods in the shops. It is therefore not surprising that the USD/ZiG rate on the parallel market has fallen to 16-17 in the last two weeks while on the WBWS market the rate has gained to now 13,2545 over the same period (Now 21 percent premium).
This also follows the firming of gold on the international market.
The strengthening witnessed above is expected to continue into the medium term especially as we draw closer to the QPD submissions around June.
Of the U$80 million worth of ZiG currently in issue, the payment of QPDS is anticipated to raise the demand for ZiG to about $150 million implying a foreseen shortage of ZiG of about U$70 million. It is wise to hid the call by the Governor to “Hold on to your ZiG”.
An argument has also been proffered for the collection of all taxes in ZiG as a measure of support for the new currency.
This argument makes sense although it has to be well timed and scheduled. Imagine collecting all VAT payments in local currency that will create a need of about US$4 billion!
There is simply not enough ZiG for that at present and that action risks crushing the market. I believe Government must therefore provide a clear road map over which eventually this target can be met as that is the ultimate goal.
In addition, it is my considered view that the well meaning MPS now in place requires further clear support from the fiscal side.
While the tax collections have commenced on QPDs, I propose that the Treasury either issues a detailed supporting statement which may even mean presenting a new budget for the year instead of the nation waiting for a supplementary budget.
In conclusion, a fresh dawn has now been ushered in with the new currency and every reason points to its success.
I strongly believe many questions in the market psych are now being answered. The market though now waits for the stability of the currency and the current shopping pattens will be reinforced again and again in each of the next three months.
When customers return to the shops and find the same prices, the confidence levels on the currency will begin to build up
Misheck Ugaro. Past Vice President and now Council Member Zimbabwe Economics Society. Misheck is a financial economist with major interest on macroeconomics
