Zimbabwe's New ZIG's Performance Trapped in RTGs Cycle

Columbus Mavhunga/VOA
John Mushayavanhu, the governor or the Reserve Bank of Zimbabwe, displays new banknotes of the country's currency to reporters, in Harare, April 5, 2024.
2 October 2024
New Zimbabwe (London)
By Gilbert Muponda

The Reserve Bank of Zimbabwe (RBZ) last week devalued the Zimbabwe Gold (ZiG) to ZiG24,39 per dollar from ZiG13,99 as monetary authorities gave in to market forces and dumped the fixed command exchange rate. Whilst the measure might bring temporary respite to the currency it comes short of bringing sanity to the currency market as it seems reactionary rather than proactive. Authorities should lead the market not follow it in terms of policy measures. When the ZiG was introduced there was great hope as the currency was supposed to be anchored by the precious yellow metal hence its name - Zimbabwe Gold. That hope has evaporated and replaced with more questions than answers.

The devaluation comes amid a sharp spike in premiums on the black market due to fears that an overvalued exchange rate would fuel market arbitrage which led to the dramatic death of the RTGS and bond notes a few years ago. The sharp depreciation indicates a sudden 74% decline which needs to be analyzed on the source and basis of such a sharp decline i.e why and how it is happening now. The currency's poor performance reflects a lack of adequate reserves to defend the currency. This depreciation will further extend its weakness as long as there are no serious foreign currency reserves to support the currency and measures to rebuild confidence in the local currency.

It is important to look at the basics of what money is and its major characteristics. Zimbabwe has been trapped in a vicious cycle of currency instability since 2003-4,2008-9,2015-6 and the problem keeps repeating itself. So key question is to look at what makes modern money, and its qualities and see where and how Zimbabwe's currency misses these qualities which then results in regular currency instability and constant loss of value which should normally be secured in the local currency.

In a modern Economy Money should have the following key characteristics and attributes:

  • Medium of Exchange: Money is a common intermediary for exchanging goods and services. (ZiG rejected at fuel stations and Passport office)
  • Unit of Account: Money serves as a standard unit for measuring the value of goods and services. (ZiG has multiple rates on cash, EcoCash, and transfer prices)
  • Store of Value: Money retains its purchasing power over time, allowing individuals to save and retrieve value. (ZiG hasn't been trusted as a store of value as people prefer US$ )
  • Portability: Money must be easily transportable and transferable. (ZiG Huge amounts difficult to transport when compared to US$)
  • Divisibility: Money should be divided into smaller denominations for smaller transactions.
  • Durability: Money withstands wear and tear, ensuring longevity. (ZiG wears out rather easily)
  • Uniformity: Standardized units ensure consistency in transactions.
  • Scarcity: regulated supply maintains monetary value.
  • Acceptability: Money is widely accepted as payment. (ZiG not accepted to buy fuel or pay for passport fees)
  • Fungibility: Money is interchangeable, with each unit equivalent to another.

These qualities and characteristics allow money to efficiently and effectively facilitate trade, commerce, and economic activity. A currency should meet all these qualities for it to be stable. When one or more of these qualities are lacking that currency becomes unstable and fails to meet its key objectives which are to facilitate economic activity and improve the standards of living within the population. These qualities are what the market looks at when any currency is subjected to a money quality test, which simply means looking at whether that currency meets all these characteristics to make it stable and attractive to market players.

The ZiG comes short in several of these key qualities such as acceptability. For starters, ZiG is not allowed to buy fuel which is a critical input in transport and industry. The lack of acceptability delivers a fatal blow to the standing of ZiG as a national currency. Zimbabwe is currently operating under a basket of multiple currencies including US$, Pound Sterling, Chinese Yuan and the Rand. This means these currencies should be usable at all establishments and accepted by all. Yet the ZiG has the misfortune of being rejected at fuel and gas stations whilst other currencies are accepted.

The acceptability test is critical and is the first hurdle that any currency should pass. Once ZiG was rejected from fuel stations one has to look at it differently. This was worsened by the rejection of the ZiG on critical Government services such as the passport application fees which do not accept ZiG. Once the Government rejects its currency then the citizens are bound to follow the trend somehow. This is only logical since if you require a passport and you have the local currency you then have to visit the street money changers to get US$ and then go back to the passport office or the service station. As soon as that trend becomes normal then that currency is living on borrowed time. The moment some critical services can't accept a "national" currency then that currency is dead on arrival and will suffer a stillbirth. In short, all Government services should accept local currency anything else will be tantamount to the Government sacrificing its own currency.

In terms of store of value, money should be able to hold its value and be predictable in its worth and value. If a currency can not be trusted as a store of value then the citizens and the market players will not move to keep this currency but rather want to dispose of it at the earliest opportunity and also totally seek to avoid this currency. It is clear that despite the plan to link the value of the ZiG to gold reserves it has failed as a store of value and the market has not accepted it as a trusted store of value hence it rapidly slid into instability yet Gold which it is linked has remained valuable and stable. This trend pushes the market to further reject the currency as its behaviour has been opposite to that of Gold on the international market.

Gilbert Muponda is an Economist, Entrepreneur and Investment Banker. He is a Founding Director of SGF Venture Capital. He holds a B.Comm Finance, MBA and a PhD Candidate and can be reached at sgfventure(at)outlook.com

Read the original article on New Zimbabwe.

Tagged:
Copyright © 2024 New Zimbabwe. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 500 reports a day from more than 100 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.