daniel chigunwe
Nelson Gahadza
Business and market experts say the recent devaluation of the Zimbabwe Gold (ZiG) wiped off the initial confidence that the currency had gained and also confirmed that the Reserve Bank of Zimbabwe (RBZ) still controls the exchange rate.
The central bank on September 27 devalued the ZiG to trade at 24,39 per dollar, down from 13,9 since May 2024 following sustained depreciation against the greenback on the parallel market.
At the fixed rate of 25, the ZiG has already depreciated further and is trading between ZiG35 and 40 to the US dollar on the parallel market. Experts warned the vicious cycle will persist until the central bank does the right thing of allowing the market to operate freely.
Zimbabwe National Chamber of Commerce (ZNCC) chief executive officer, Chris Mugaga, told Business Weekly on Wednesday that it becomes risky for planning and business will be the biggest victims of the will and caprices of the central bank choices.
“What happened was sudden, but then it was abrupt, it was unplanned and should not happen again.
What should happen again is to see the market operating with the exchange rate getting adjusted time and again for every hour or every day.
“Surely, there is no reason for an exchange rate to be stagnant for more than 48 hours without it moving or adjusting like any other exchange rate across the world,” he said.
He said that the RBZ wiped off the confidence in the ZiG by devaluing it, but pointed out this should not be the bank’s role to manage and float the exchange rate.
Mugaga argued that the apex bank should simply create an environment that makes the exchange rate follow the forces of demand and supply, without intervening in the market.
“The RBZ move confirmed it (ZiG) is still a controlled and fixed exchange by the central bank which is a disaster and it creates problems,” he said.
Mugaga said the central bank can not “wake up on the other side of the bed and say the rate is now too low and adjust it again”, and that would continue to erode the balance sheet of many businesses.
“We have seen the impact every day, you have ZiG20 million in the bank, it is adjusted and before you know it, it is already ZiG 8 million, so our query remains that . . . allow the market to set the pace on exchange rate,” he argued.
According to Equity Axis, no currency can sustain a pegged rate that is not determined by the market, even if the forex reserves are sufficient. It said this was the same path that led to the demise of the Zimbabwe dollar.
“So, what will be the long-term solution? First, the Government must abandon the pegging of the currency.
“The ZiG needs to be floated and determined by demand and supply metrics.
“Additionally, the Government must exercise fiscal discipline and manage the monetary supply responsibly.
“Resorting to excessive money printing, especially with disputed reserves, will only create high demand for the US dollars, which are insufficient, further weakening the local currency,” argued Equity Axis.
It also highlighted that beyond fiscal responsibility and the abandonment of pegged rates, there was need to create demand for the local currency.
“A currency cannot function if it cannot be accepted as a means of payment for critical services like fuel, passports and Government taxes. If this fails, it ceases to be a currency.”
However, Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube argues to the contrary.
Recently, Mthuli said at the current exchange rate of ZiG 25 to US$1, there now were enough reserves to cover the entire ZiG deposits in the banking sector.
“The current deposits are ZiG10 billion and the value of the reserves is US$425 million.
“At the exchange rate of 25, that amounts to about ZiG10 billion.
“So, we have more than adequate cover for ZiG through our reserves and there is no reason for the currency to come under any form of pressure with adequate cover,” he said.
But Farai Mutambanengwe, founder and executive officer of SMEs Association of Zimbabwe, told this publication that when the ZiG was issued, there were promises that there would be no “unjustified” printing of ZiG and that value would be linked to the value of gold, but now those things have happened.
“Also, when the ZiG was issued, there were some people who were on the foreign currency willing buyer willing seller market and were given treasury bills instead of (the equivalent of ) their money (in forex).
“So, now what it effectively means is that when the ZiG was devalued, those that had the treasury bills lost about 80 percent of their value from the depreciation,” he said.
He said the move meant confidence in the ZiG was shattered, adding that people holding ZiG were just buying anything from retail shops just to discard the ZiG, while the retailers were stuck with the local currency as their suppliers were demanding US dollars.
Financial economist, Malone Gwadu, said a cocktail of measures beyond devaluation was needed in the short, medium and long term.
He said the short-term measures required included increasing demand for the ZiG so that it finds takers in the market, which would stop its seemingly rampant rejection in the market.
“Government needs to bite the bullet and increase ZiG acceptance across all tax heads and all departments. This will increase its circulation because it is the biggest economic player and can leverage on that,” he said.
In the medium to long term, Gwadu said the economy needs to accelerate production across all sectors, which will be the anchor of the ZiG and its stability.
However, recently Mthuli announced plans to require taxpayers to pay most taxes and fees in the local currency in an effort to increase demand and drive up its value.
According to the Finance Minister, customs duties are already payable in local currency, and other taxes will follow suit. This includes payment for government services, aiming to shore up demand for ZiG. The government also plans to restructure debt and issue long-term securities to contain debt servicing costs.
By requiring tax payments in local currency, the government hopes to boost demand and stabilise the ZiG.
Bongani Ndlovu