daniel chigunwe
Business Writer
Zimbabwe’s new local currency, the Zimbabwe Gold (ZiG), has tumbled another 11 percent in less than a month after officials announced a 43 percent “devaluation.”
Despite claims by monetary authorities that the steep 43 percent official adjustment was a “once-off”, the local currency has remained under pressure on both the official market and the black market.
The local currency was officially devalued from around ZiG14 per US$1 to ZiG24,39 per green back on September 27.
Central bank governor, Dr John Mushayavanhu, told the Zimbabwe Broadcasting Corporation in an interview that the sharp drop of the gold backed currency “was a once-off”.
“We expect things to stabilise going forward and should start to see prices fall,” said Dr Mushayavanhu.
But despite his assurances, the local currency has remained under pressure and has lost another 11 percent from ZiG24.39/US$1 on the 27th of September 2024 to ZiG27,44/US$1 as shown on the apex bank’s website as at 5 pm yesterday.
While authorities and market players agree that nothing much, in terms of forex trading is happening on the parallel market, street dealers are quoting between ZiG35 and ZiG40 per greenback.
Other economic agencies are using the same rate to price their goods and services and this may see October inflation, set to be announced today, remaining elevated.
Analysts say the continued slump on ZiG would keep upward pressure on both US$ and ZiG prices, hurting households and businesses.
Writing in a column in a South African based publication, Moneyweb, Jonathan Munemo, Professor of Economics, Salisbury University, said a “further risk factor from currency instability is that it would deter foreign investors worried about the ZiG as a reliable store of value.
“The prospect of declining business investment, loss of confidence in the ZiG, and anaemic consumption would in turn be a major drag on economic activity,” he wrote in an article published on Wednesday.
Prof Munemo noted that the recent devaluation has not eased concerns about Zimbabwe’s struggles to develop and maintain a domestic currency that can be widely used for transactions and as a store of value on a voluntary basis.
“Authorities must confront the fundamental causes, which are rooted in a loss of faith in the ability of the Government to manage spending. In particular, its habit of printing money, overspending on its budgets and failing to expand the economy,” he said.
Some observers say the instability of the local currency will remain for as long as the Government is servicing legacy debts, including the US$3,6 billion Treasury assumed from the central bank.
Loan repayments from a constrained budget are seen as the major source of money supply growth.
Government is having to buy forex from exporters to pay off debts, hence either crowding out current projects, or resulting in excessive money supply growth.
Economic analyst and Small Enterprises Association of Zimbabwe (SMEAZ) chief executive officer, Farai Mutambanengwe, said the exchange rate might move toward a crawling peg.
He, however, said the fundamental problem remains that ZiG is not meeting the key attributes of money, namely medium of exchange, store of value and exchangeability.
“Thus ZiG rejection will not abate, neither will market sentiment towards it,” he said.
Another economic analyst, Kudakwashe Mugova, said the devaluation was an acknowledgement that the exchange rate was being controlled as evidenced by the existence of a pipeline of invoices.
“Secondly, the complementary measures were not sufficient to make holding ZiG attractive. The daily marginal fall signals to the market that reserves are not sufficient to anchor our currency.”
Such a scenario, according to Mugova, anchors high inflation expectations and lack of desire to transact in the local currency.
“What markets expect is another devaluation in the form of continuous growth of the parallel market premium.
“We just hope for a better rainfall season to reduce pressure on the forex that the government has control over,” said Mugova.
To ease the exchange rate pressure, Mugova suggested that the Government “slow down on some projects that are less urgent or critical to reduce pressure on the currency or forex holdings”.
Walter Mandeya of Trigrams Investments, said the further depreciation of the ZiG is additional proof that the structural integrity of the ZiG has some serious flaws that need to be openly discussed with a wider range of stakeholders.
“The Monetary Policy Committee and the RBZ are either in denial or are failing to correctly interpret the information reaching them. We need the ZiG to succeed. We need the Governor to succeed. That means we have to come together and ask those difficult questions like, “what exactly is the ZiG?”
Why is it continually depreciating? How do we secure it from further loss of value?”
To stabilise the local currency, Prof Munemo suggested that policymakers must tackle the root causes of the nation’s currency struggles.
He said steps that can be taken to resolve longstanding structural factors include re-prioritising public spending by undertaking deep fiscal reforms that will divert more resources towards spending on health, education, public infrastructure and other critical investments needed to boost growth.
“These reforms should also aim to capture more revenue from growth, for example, through tax reforms. Implementing reforms to address corruption and improve governance is essential for imposing the discipline necessary to push back against covering fiscal deficits by printing money and for restoring faith in government institutions.
“Pursuing credible policies for more sustainable and private-sector-led growth. Strong growth expands tax revenues and gives the government more policy space to spend on essential services and critical investment needs,” he suggested.
Bongani Ndlovu