- RBZ has injected a total of $114 million into the forex market, including $64 million in September
- The ZiG is currently trading at 13.99, while on the parallel market it has surged to a premium of over 100%, reaching ZiG28 per USD.
- ZiG is ultimately is likely doomed to fail, mirroring the fate of its predecessors
Harare- The Reserve Bank of Zimbabwe has injected US$114 million into the forex market to meet rising demand for foreign currency and stabilize the run-away ZiG. In a statement, RBZ said US$50 million was injected in July alone, while US$64 million was injected in September.
This move aims to stabilize the local currency, which has been experiencing volatility due to increased money supply from national projects, particularly road rehabilitation programs initiated ahead of the SADC summit.
Currently, the Zimbabwe Gold (ZiG) is trading at 13.9883, shedding 3% from its introduction in April at 13.56.
However, on the parallel market, the currency is trading at a premium of over 100%, moving away from 13.99 to 28 per dollar.
The premium has been steadily widening since the currency's inception and is now at its worst level. US$1 is trading at an equivalent of ZiG28 on the parallel market, compared to a rate of US$1 to ZiG 13.9 on the formal market.
The promise of a stable rate has dismally failed. Just like its predecessors, the ZiG is doomed to fail.
In retail stores, a product with a real price of US$3 is now marketed at US$6, tracking the 100% premium.
To maintain value, retailers circumvent the government's order that prices should follow the official exchange rate. They fix the USD price and let the ZiG price, on conversion, track the original value in US$.
The currency was introduced in April, replacing the Zimbabwe Dollar, which closed each respective year with annual losses of at least 80% against the US dollar due to the pegging of rates.
Similarly, the value of the ZiG on the formal market is not scientifically determined. The RBZ pegs it, and when they decide the rate will then be adjusted to their desired level, hence, it is doomed to suffer the same failure.
Even where reserves are in place, the value of currency should be independently determined by the markets, referring to the forces of demand and supply of the currency against competing currencies in the open market.
Pegging a currency's value takes away the role of market forces in price discovery. For a pegged currency to achieve effective stability, the central bank will have to be very disciplined.
A disciplined approach will entail managing the money supply and general monetary policy conservatively to avoid oversupply of local currency and its subsequent depreciation.
However, financial managers lack discipline, playing with money supply recklessly.
Reserves deposits grew by 38% from $853 million in June to $1 billion, while M3 increased by 100% from $5.4 billion to $9.2 billion during the same period, exacerbating exchange rate volatility and posing significant challenges for the currency.
The latest US$64 million injection in September has failed to cool down the rates, practically not covering a quarter of export demands.
The government claims reserves are enough to mop up excess liquidity, but we contest that the bank had 2.5 tonnes of reserves when the ZiG was introduced.
The figures are disputed, as if reserves were sufficient, they should have been easily liquidated and injected as forex supply whenever demand for forex outpaced its supply.
Zimbabwe's gold reserves plummeted to just under 3 tonnes at the height of hyperinflation in 2008 and remained stagnant until 2022.
Between October 2022 and March 2024, estimated mining royalties accrued to 1.5 tonnes, reflecting the actual reserves at the time of the ZiG's introduction.
The current currency regime cannot withstand the test of time and will eventually collapse.
It is nothing short of a miracle that the currency has persisted this long.
Ultimately, the government will be compelled to abandon the fixed exchange system or devalue the currency to align with the parallel market.
However, such a move would offer only temporary relief, merely postponing the underlying challenges rather than resolving them.
Eliminating the fixed exchange rate system and implementing a hawkish monetary policy, alongside strict fiscal discipline, could enhance the prospects for currency stability. Regrettably, it seems the government is not yet prepared to engage in this crucial discussion.
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