Online Reporter
GOVERNMENT’s decision to pay all its local suppliers exclusively in ZiG was anchored on the strength of foreign currency reserves created as part of the reform process and was the obvious next move on the journey to the single-currency society.
Past efforts to pay local suppliers for Government contracts in local currency had hit those brick walls of inadequate foreign currency and high inflation, leading to suppliers seeking foreign currency on the black market to both buy the imported component of what they were selling to Government and to stash as much foreign currency in their nostro accounts as possible to preserve value.
With the Reserve Bank of Zimbabwe fully backing the Government move, we seem to have another manifestation of the modern approach of fiscal and monetary authorities, that is the Finance Ministry and the Reserve Bank, keeping each other fully informed and working on the timings of their independent reforms together.
This time the Reserve Bank has undertaken to ensure the willing-buyer willing-seller market has enough foreign currency.
This is what central banks are supposed to do, smoothing out any sudden rises or drops in supply of foreign currency so that the longer-term trends are allowed, in full sight of everyone, to govern smooth change.
Last year, around US$16 billion in foreign currency flowed into Zimbabwe, and with the positive balance of trade in the later months — meaning we now export more than we import — and the current account surplus — meaning inflows of foreign currency exceed outflows—throughout the year quite a bit of this foreign currency surplus has been building up in reserves.
These reserves have now topped US$1,5 billion in gold and foreign currency, dwarfing the equivalent of the US$400 million worth of ZiG in the system, with the main complaint about ZiG being tight liquidity, rather than cash sloshing around, and the determination of the Reserve Bank and Finance Ministry to control liquidity conservatively.
The Reserve Bank noted strongly this week that there was no need for Government suppliers to create stashes of foreign currency in their nostro bank accounts or buy piles of foreign currency banknotes to keep in a safe.
When they want to buy foreign currency for legitimate purposes, paying for imported components for what they sell to Government or for services required, they simply see their bank.
They then move to the willing-buyer-willing seller interbank market and buy what they need and, thanks to the surplus inflows of foreign currency, get it without any hassle, especially with the Reserve Bank willing to intervene when necessary.
Very low inflation rates for ZiG prices are now prevalent, as was seen with the very low monthly inflation every month last year, so there was a build-up of confidence and data.
That in turn saw the switch to very low annual rates this year, 4,1 percent in January and 3,85 percent in February, as monthly price rises before the beginning of last year disappeared from the calculations for the last 12 months.
The fact that annual inflation rates are built on what happened in the past 12 months means that they are not flashes in a pan, but a long term trend.
This in turn means that when a supplier banks their ZiGs from Government, they retain value and their cash no longer needs to be turned into piles of US dollars kept in a safe for armed robbers to hit, or even in a nostro account.
Those who wonder about the revolution should reflect on what happened around a year ago when the authorities allowed all Zimbabwean retailers and others businesses to set their own exchange rates. The pile of statutory instruments forcing them to follow the interbank rate were dumped without replacement.
The result was that nothing changed. The retailers kept the exchange rates they had been permitted to use, and with the exceptionally low monthly inflation since, have kept them unaltered.
They still have imported items in stock, but either use the foreign currency from some of their customers or simply go to their bank with the invoices and arrange payment in foreign currency.
There had been prophets of doom as that change was made, but they were wrong. The new Government move is the second major step after that major revolution that had no side effects.
The Reserve Bank has made it clear that there is no timeline or deadline for the transition to a pure ZiG local economy, but that it is a process governed by how well ZiGs are accepted and trusted.
When no one cares what currency they are paid in the process is largely complete and the Government move on payments is a major step in that process.
We expect that as with the liberalisation of exchange rates used by retailers, the changeover will cause hardly a ripple.
