Will ZiG currency survive the economic crisis?

By Abednico Bhebhe | Apr. 25, 2024

Hedging a local currency against gold reserves is ideal in a fully functional economy; unfortunately in our situation that is not the case.

THE transition of the Zimbabwe Gold (ZiG) currency from Zimdollar (ZWL)/Real Time Gross Settlement (RTGS) has been received with a lot of scepticism and uncertainty, by both business and society at large. From April 5, 2024, the local currency was temporarily suspended while business, parastatals and some government institutions were transiting from ZWL to ZiG. Surprisingly, it was business as usual for most if not all business transactions.

The acceptance of the ZiG will depend largely on market confidence because the economy remains somewhat dollarised and that could make it difficult for the market to easily accept the ZiG currency. For the record, ZiG is the sixth such attempt at resuscitating the national currency and it has been an uphill struggle. This time around the market has been taken by surprise with very little information availed to the public.

Hedging a local currency against gold reserves is ideal in a fully functional economy; unfortunately in our situation that is not the case.

For more than two decades now, Zimbabwe has had budget deficits, continually ballooning domestic and foreign debts which have been worsened by persistent droughts due to climate change. The picture has not been good since.

Understandably, many people have actually lost confidence in the capacity of their own government to resolve the country’s economic challenges. Given the worsening job losses, company closures and declining production, there are very limited avenues for revenue collection by government. Therefore, Treasury has to find money somehow to compensate for that deep hole in the economy.

It is a surprise to many that the Reserve Bank of Zimbabwe (RBZ) can simply peg the currency at a rate of 1:13,56, with no clearly defined formula that scientifically explains that rationale. But of course this is the same RBZ that introduced a currency it called RTGS, guaranteeing its value at a fictitious rate of 1:1 to the United States dollar. One wonders if any lessons have been learnt? Only time will tell.

Repeating the same thing over and over again and expecting a different result!

Surely economic recovery cannot just be through change of currency, but fundamentally the economy must undergo a process of adaption and adjustment to new conditions, including factors that triggered the economic recession in the first place and the new policies and regulations implemented by government through RBZ in response to the recession. During the recovery period, businesses invest, employment rises and consumer spending increases. Will the change of currency ever achieve that? It is very unlikely.

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Stabilising a local currency does not necessarily entail change of currency, but should consider the following:

Provision of direct capital injection through investments, loans and grants.
Injecting capital into the banking system to spur investment.
Increasing economic activity through public-private partnership structures.
Attracting foreign direct investment (FDI) and stemming the losses of FDI.

In that case, it is high time that Zimbabwe did away with damaging policies and stamp out corruption. Government should dump economic policies that have proven unattractive to local and foreign investors. Corruption has been a major impediment to economic growth in Zimbabwe for years and it has to be dealt with decisively. His Excellency President Emmerson Mnangagwa and his government should work extra hard to fight the widely held view that at the top of the corruption tree are top government officials. We need to negotiate with foreign lenders, both in Africa and on the globe, while also enticing the diaspora to not only return but invest in our economy.

Creating our own stable currency should be a long-term matter while we use the multi-currency as a short-term measure. However, we should be cognisant that confidence of both business and the public is key to achieving a sustainable currency. In fact, the ZiG might do next to nothing in addressing the perennial cash shortages and may even worsen the situation by pushing up the demand for the US dollar.

Government should understand that putting money in a very expensive banking system is no longer considered as the best option unless the payment method is a bank to bank transaction. At the same time, business and the public often fear that the RBZ may again raid their hard-earned US dollars. Therefore, the new ZiG currency may not address the fears and the cash shortages because of past negative experiences.

In conclusion, the public will only have confidence in the new ZiG currency if they start seeing the following six signs of economic recovery:

Employment — Creation of new jobs, where there is enough economic activity to get business moving again.
Consumer spending — Generally, the economy is driven by consumer spending. It is difficult to imagine a recovery that does not include consumer spending. Long term, consumers realise that they should save more and spend less, but that does not occur if they have no confidence in their currency.
Consumer sentiment — Sentiment indicators such as those expressed through the Consumer Confidence Index, which correlate with reality more often than not. Those surveys rate how people feel about their currency and economy.
Business indicators — Optimism and expansion in business, seeing new orders, higher production levels, timely delivery from suppliers and increased inventory and employment.
Bank lending — Without banks underwriting new affordable loans, private sector does not grow. Without growth, it is difficult to create employment and a stable recovery.
Shipping activities — Businesses buying and selling goods (exporting and importing): overall economic activity correlates with the movement of goods across continents and oceans.

When that happens, Zimbabwe should start seeing a steady economic growth and reduced inflation, an increase in home ownership and construction as well as an increasing gross domestic product. That should be the right time to introduce a new currency when its chances of survival are high.

Consumer sentiment — Sentiment indicators such as those expressed through the Consumer Confidence Index, which correlate with reality more often than not. Those surveys rate how people feel about their currency and economy.
Business indicators — Optimism and expansion in business, seeing new orders, higher production levels, timely delivery from suppliers and increased inventory and employment.
Bank lending — Without banks underwriting new affordable loans, private sector does not grow. Without growth, it is difficult to create employment and a stable recovery.
Shipping activities — Businesses buying and selling goods (exporting and importing): overall economic activity correlates with the movement of goods across continents and oceans.

Abednico Bhebhe is a former legislator and current President of the Motor Industry Employers Association of Zimbabwe and writes here in his personal capacity.