The new ZiG has held its value over the two months since its introduction partly because all possible hidden taps adding to money supply have been tracked down and turned off, and partly because the Reserve Bank of Zimbabwe, through its Financial Intelligence Unit, and the police have maintained heavy pressure on the black market.
The ZiG is not at fixed exchange rates because it is a floating currency, as almost all modern currencies have been for the last 40 years, with the commercial banks in Zimbabwe setting their own bid and ask rates each morning as they look at supply and demand for foreign currency.
The weighted average of the combined rates set by the commercial banks forms the interbank rates, with the mid-rate between the average bid and ask rates being the official daily exchange rate.
But the daily movements are now very small, well under one percent, as is the case with almost all currencies, and have tended to balance out over a few days of dealing, although the currency has strengthened slightly since its introduction as the daily rises in value outweigh the daily falls.
The ZiG is backed by gold and foreign reserves of the Reserve Bank, but these could have been quickly sucked dry unless the money supply problem had been sorted out.
Government itself switched off its taps almost six years ago at the start of the Second Republic when it switched to an almost extreme form of fiscal discipline, but fairly obviously there were other taps that needed to be tracked down, and not all of them were obvious.
Some of these were in the private sector, with the speculators and black market creating some of them as well as distorting exchange rates which created others, and at least one appeared to have been in the Reserve Bank itself when it was still the authority buying the compulsory 25 percent of all export earnings by creating local currency to do this.
The policy switch last year, that saw the Ministry of Finance, Economic Development and Investment Promotion take over the role of buying these compulsory surrenders of 25 percent of export earnings seemed to have closed the last tap, and at the same time removed the last of the quasi-fiscal operations of the Reserve Bank.
All fiscal operations of the authorities need to be done through the Treasury, which cannot create or destroy money, only accept revenue, move revenue between bank accounts and spend revenue from those same accounts. It cannot even be tempted to do anything else and in any case has to tell Parliament everything and get Parliament's permission to spend anything. The Government can borrow, but these days has to do this properly and tell us what it is doing and how it is doing it, and since 2018 the Finance Ministry has been earning plaudits for its tight fiscal discipline.
And the Reserve Bank has made it clear that it will not create money for the Government to spend. Everything in the budget has to come from taxes or proper borrowing.
That still left the private sector creating money and putting unnecessary pressure on the exchange rates.
Much of this was being done through speculation and speculative borrowing. It took a few years to track all of that down, but eventually the measures succeeded and it became too expensive to fund most speculation as all interest rates went positive.
The black market itself was creating distortions, largely to create speculative profits with rates bearing no tie to actual value.
The major attack on the black market over the last couple of months has certainly tamed that market, with several hundred dealers now facing trial, and doing so in remand prison since magistrates have been reluctant to grant bail.
But besides this police offensive using the criminal law, the Reserve Bank has been fighting a civil law battle through its Financial Intelligence Unit. The FIU has through monitoring bank accounts been upgrading the information it acquires and has been investigating more deeply as it sees oddities in financial transactions.
This has already seen 522 bank accounts frozen and 140 holders of bank cards have been hit by severe civil penalties after FIU reckoned that the cards were being used by middlemen in supermarkets and shops to circumvent exchange control.
This was a dealer offering a ZiG card to a shopper with US dollars, so that the shopper would buy with that card and then pay the US dollars to the dealer at a black-market exchange rate.
The strong pressure by the FIU has seen this almost vanish, and with the police hitting street dealers, shoppers are no longer bothered at supermarket doors and even in the shopping aisles by dealers. The FIU has been hunting down card holders whose cards suggest the holder is making a lot of purchases from the same shop every day, and on investigation cannot explain why.
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Civil penalties do not generate a criminal conviction, but require only the balance of probabilities, rather than proof beyond reasonable doubt.
There are still black market dealings, but these are now between buyers and sellers who know each other, and both are worried that the person they are dealing with could be a police officer.
The FIU is keeping a look out for peculiar transactions that would suggest a black market deal so even here the risk grows that a dealer may become the centre of FIU attention.
The ZiG is likely to strengthen a bit further this month under the Government policy that the second quarter corporate tax bills must be paid at least 50 percent in ZiG, meaning the major exporters will have to see more of their foreign currency to buy the ZiG they need for taxes, thus boosting supplies of foreign currency.
But this is largely icing on the cake, with the effective control of money supply and the hammering of the black market by the reinvigorated FIU and police now allowing exchange rates to be set purely by the commercial banks, and these finding that supply and demand of foreign currency remain roughly in alignment every day.
