• ZWG has shown marginal declines, closing at 23.3656 against the US dollar, with a persistent premium of 35% to 54% in parallel markets
•  While 50% of taxes are mandated in ZiG, certain sectors and services like fuel, rentals, and passports remain exclusively priced in US dollars
• Past currency reforms, such as the ZWL, collapsed due to fiscal mismanagement and money printing

Harare- The Zimbabwe Gold (ZiG)  experienced marginal declines, depreciating by 0.1% last week and further by 0.2% this week, closing at 23.3656 against the US dollar. This relative stability is largely attributed to tightened liquidity conditions within the local currency framework.

According to the latest monthly economic review from the Reserve Bank of Zimbabwe (RBZ), the broad money supply (M3) decreased by 4.97%, from ZiG87,540.19 million in October 2024 to ZiG83,226.83 million in November 2024, primarily due to exchange rate appreciation and valuation adjustments.

This contraction in liquidity has increased demand for the ZiG in the limited transactions where it is utilised, subsequently reducing the parallel market rate from 50 in November 2024 to 40 in January 2025, while peer-to-peer rates declined from 45 to a range of 35 to 38 per US dollar.

Despite these measures, a significant premium of 35% to 54% persists between the official and parallel market rates, raising questions about the efficacy of the government’s stabilization efforts.

When the ZiG was introduced, the Treasury mandated that 50% of taxes, including income tax, corporate tax, and presumptive taxes, be paid in local currency largely said in the 2025 budget.

However, the budget also allows for certain sectors and taxes to be settled exclusively in US dollars. This dual-currency policy undermines confidence in the ZiG, as it signals a lack of full commitment to the local currency.

Additionally, Zimbabwe’s highly informal economy, which accounts for approximately 70% of transactions, predominantly operates in cash and US dollars, limiting the ZiG’s acceptance and utility in critical sectors.

Core services such as fuel, rentals, and passports are exclusively priced in US dollars, further eroding the ZiG’s relevance. For instance, fuel imports in 2024 totalled US$1.5 billion, comprising US$1.1 billion for general fuel and US$472.84 million for leaded petrol, all transacted in US dollars for resell in the country.

This highlights the missed opportunity to strengthen the ZiG by denominating such essential commodities in local currency.

The reliance on the informal market for foreign currency exacerbates the situation. With banks unable to meet the demand for US dollars, individuals and businesses turn to the unregulated parallel market, where the greenback circulates freely.

This dynamic creates a persistent premium, offsetting any gains from government taxation policies and failing to maintain an equilibrium premium or even of between 10% to 20%.

Historical trends further complicate the outlook. Under the leadership of John Mangudya, the ZWL stabilised temporarily due to tightened monetary policy from July to December 2024.

However, in January, the government increased money supply to fund presidential schemes and salary adjustments, causing the exchange rate to skyrocket, surpassing 1000 per US dollar.

The current administration faces similar risks, with a significant budget deficit likely to be financed through monetary expansion, given the reduction in US aid and the government’s historical reliance on money printing. This could destabilize the ZiG, causing the premium to balloon beyond 60% in the first quarter of 2025.

The government’s budget projections anticipate an average exchange rate of 36 by the end of 2025, implying an annual depreciation of 52%. This suggests a potential devaluation of the ZiG, similar to the September 2024 adjustment, which could widen the premium to 80% by year-end.

Such actions further erode public trust in the currency and government policies.

Zimbabwe’s lack of economic fundamentals to support a new currency remains a critical issue.

The introduction of the ZiG, the fourth currency in almost a decade, was more of a Ponzi scheme, as it lacks the foundational trust and confidence necessary for long-term viability.

Behavioural economics dictates that without addressing underlying confidence issues, any currency reform is destined to fail, as evidenced by the collapses of the Bond Note, RTGS, and ZWL.

To achieve sustainable currency stability, the government must first establish a robust policy framework that fosters public trust and addresses structural economic challenges. This includes reducing reliance on US dollars for critical transactions, formalising the informal economy, and implementing disciplined fiscal and monetary policies.

However, in order to create life, one has to destroy life. Similarly, to eliminate the US dollar, the government must first remove the local currency in the short term while building strong fundamentals in the process. This involves accumulating sufficient reserves to support a new currency before its introduction and dealing with public trust. The government should not hesitate in taking these necessary steps.

The current approach of introducing a new currency amidst ongoing economic instability will not succeed.

 A long-term strategy focused on building economic fundamentals and restoring public confidence is essential for the ZiG to achieve longevity and stability.

Without these measures, the cycle of currency failures will continue, perpetuating Zimbabwe’s economic challenges.

Equity Axis News