THE introduction of the Zimbabwe Gold (ZiG) currency in Zimbabwe has been met with scepticism, as it has experienced a significant depreciation on the parallel market within just a month.
As a result, the government has enacted a new statutory instrument imposing fines of ZiG200 000 on companies that price their products based on rates higher than the official market rate, but it raises questions about the effectiveness of relying solely on statutory instruments.
The government's approach of rehashing old policies, such as imposing fines, has failed to achieve its objectives in the past and may not lead to different outcomes this time.
The introduction of the ZiG currency in Zimbabwe's ongoing currency struggle has been met with a wave of pessimism, much like its predecessor, the Zimbabwe dollar. In just a month since its inception, the ZiG has experienced a significant 36% depreciation on the parallel market, which represents the real market determined by the forces of supply and demand.
While the government is actively pegging the exchange rate in the formal market to ensure the longevity of the ZiG, it is essential to assess how the currency is performing in the alternative free market.
The ZiG was launched on April 5, 2024, with the government claiming to back it with reserves amounting to a substantial sum of up to US$285 million.
These reserves include US$100 million in cash and 2,5 tonnes of gold valued at US$185 million. The primary function of reserves is to maintain a balance between the forces of demand and supply. Consequently, when there is high demand for foreign exchange (forex), the government injects additional funds into the economy to stabilise the currency.
Notwithstanding the government's assertions of possessing reserves, their efforts have proven futile in salvaging the ZiG from its untimely demise, as the currency's devaluation persists at greater rates within the alternative market.
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Instead of utilising reserves to intervene and rescue the ZiG, the government has taken stringent measures against street money changers, who have emerged due to the government's inability to satisfy the demand for US dollars needed for transactions involving fuel, passports, and licenses—activities that cannot be conducted using the ZiG.
On May 9, 2024, the government enacted a new statutory instrument, Statutory Instrument 81A of 2024, as the most recent measure to support the struggling ZiG currency—a significant and forceful action. This instrument imposes penalties of ZiG200 000 on companies that price their products based on rates higher than the official market rate.
However, it raises the question of whether an economy can effectively operate solely through statutory instruments. In light of the introduction of Statutory Instrument 127 of 2021, which companies like Econet Wireless, NetOne, and TelOne failed to comply with and got zero punishment, one might wonder if they will now bow down to the current measure.
What gives the government the confidence that rehashing old policies will lead to different outcomes? A similar instrument was passed in 2021 under similar circumstances, resulting in a government crackdown on various sectors including companies, schools, hospitals, and pharmacies.
However, this approach failed to achieve its objectives due to a lack of understanding of basic economic principles, such as supply and demand. The government is currently facing a shortage of US dollar reserves, which hinders its ability to provide companies with the necessary foreign currency for importing raw materials and products.
Since the land appropriation in 2000, Zimbabwe has become heavily reliant on imports, making it a net importer for almost all goods. Consequently, companies resort to pricing their products based on the parallel market rate.
This practice allows them to mitigate losses when restocking and importing raw materials by purchasing dollars from the alternative market.
From the perspective of the companies, this approach seems fair. The government currently holds reserves of US$100 million in hard cash. However, during the operation of the auction market, the weekly demand for foreign exchange averaged around US$16 million, which the government failed to meet within a reasonable timeframe, often taking up to four to nine weeks.
This indicates that the government has already depleted its reserves considering the demand that existed when the auction market was active, leading to the current volatility in exchange rates.
Additionally, the country faces a high import bill exacerbated by the drought, which cut the maize harvest by 70% and declining global metal prices, further straining Zimbabwe's foreign currency reserves. Consequently, both the nation and the business community now require foreign exchange more than ever before including ZiG. The implementation of the new instrument, if followed by companies, will likely result in empty store shelves.
When businesses attempt to restock, they may encounter difficulties as the central bank may be unable to provide foreign exchange, or if provided, it may be delayed.
On the parallel market, the exchange rate for the US dollar will be higher, making it unaffordable forformal businesses. As a consequence, formal businesses may face financial challenges, contributing to the further dominance of the informal sector in the economy.
Regrettably, the actions taken by the government appear to be focused on addressing the symptoms of the problem rather than tackling its root cause.
The increase in prices of goods and services above the official rate can be attributed to the Reserve Bank of Zimbabwe's inability to meet the demand for US dollars from these businesses.
As a result, these companies are left with no choice but to rely on the black-market exchange rate to determine prices and obtain United States dollars from street vendors in order to replenish their stocks.
It is not advisable for the government to punish retailers and producers in this situation. Such measures would likely compel producers to cater exclusively to the informal sector, which operates in US dollars.
Instead, the government should consider directing its attention towards its own ministries and departments, urging them to accept the local currency (ZiG) for transactions, such as issuing licences, passports, and purchasing fuel.
By implementing penalties for non-compliance, the government can address the issue at its core, as these are essential services that are currently driving the public towards the informal market.
Additionally, unless ordinary citizens have access to foreign currency through official channels, money changers will continue to thrive. As for the suggestion of the government adopting a stable dollarisation policy for a minimum of five years and building reserves, it could potentially contribute to addressing the current economic challenges.
Dollarisation can bring stability to the economy by reducing currency volatility and instilling confidence in both local and foreign investors. Building reserves would help ensure a steady supply of foreign currency, which can be used to meet various financial obligations and maintain stability in the long term.
However, the feasibility and potential consequences of such a policy shift would need to be carefully assessed and planned to mitigate any potential risks or negative impacts on the economy
- Equity Axis is a financial media firm offering business intelligence, economic and equity research. The article was first published in its latest weekly newsletter, The Axis.
