• ZiG experienced a 1% decline on the formal market indicating a relative stability
  • On the parallel market, the exchange rate surged by 5%, resulting in a significant 36% depreciation
  • Government issues a new SI unit to save the trembling ZiG

Harare- The currency crisis in Zimbabwe remains a significant concern, with Zimbabwe Gold (ZiG) facing potential premature failure. We closely monitor the performance of ZiG against the US dollar on both the formal market (FM) and the parallel market (PM) on a weekly basis.

Currency plays a crucial role in the economy as it has a direct impact on the daily lives of the general population, local and international trade, and government finances through tax contributions. Expenditure within a country, exports, and the overall national budget are all influenced by the performance of the currency.

On May 9th, 2024, ZiG experienced a slight decline of 0.7% on the formal market, dropping from ZiG13.4190 the previous week to ZiG13.5326. This indicates a relatively stable performance in that market.

However, on the parallel market, the exchange rate surged by 5%, rising from ZiG20 per dollar to ZiG21 per dollar. This translates to a significant 36% depreciation compared to the formal market rate.

The performance of ZiG compared to the Bond Notes currency indicates a challenging start, as ZiG has experienced a higher depreciation. During its first month of circulation, the Bond Notes currency depreciated by 20%.  This unfavorable performance has led to concerns about the potential failure of ZiG.

On May 10th, 2024, the government implemented statutory instrument 81A of 2024, which makes it illegal to charge prices for goods above the interbank rate which many believe that this interbank rate is fixed and not determined by market forces hence weaponization of the exchange rate.

Violators of the regulation mentioned above may face fines of up to ZiG200,000. This legislation is similar to SI 127 of 2021, which resulted in prominent companies like National Foods being publicly shamed and fined.

However, the enforcement of such regulations without addressing underlying production issues to boost exports and US dollar reserves had led to empty store shelves, higher prices in US dollars, and increased exchange rates for both USD and the then Zimbabwean dollar.

One might question why ZiG is struggling despite the government's claim of backing it with reserves of US$100 million and 2.5 tonnes of gold worth US$185 million.

It should be noted that the government is artificially pegging the exchange rate rather than allowing market forces to determine it. This pegged rate has resulted in a rapid loss of value on the parallel market, where exchange rates are determined by market forces.

There are even doubts regarding the government's claimed reserves of up to US$285 million. If these reserves truly exist, one might question why the government has not utilized them to adequately support ZiG and address the currency crisis.

This raise concerns that the government's statements may lack substance and are merely empty threats. It is important to recognize that an exchange rate cannot be legislated or controlled through legislation alone.                       

In addition to these currency-related challenges, Zimbabwe is also facing a significant decline in maize harvest, estimated to be around 70%.

This decline is occurring alongside declining global metal prices, which have had a severe impact on Zimplats, the country's largest contributor to the national fiscus. These factors further contribute to the difficulties faced by ZiG, suggesting that its future prospects may be even more challenging.

Zimbabwe heavily relies on revenue from mineral exports, which are currently being adversely affected by global geopolitical uncertainties. This situation has significant implications for the country, as it will likely experience a decline in tax contributions just as the import bill, which requires more US dollars, is rising.

This scenario puts the government in a challenging position, where it must decide between saving the struggling ZiG currency or addressing the needs of the general population.

To support ZiG and prevent further depreciation on the parallel market, a substantial number of US dollars is required. However, with limited US dollar reserves, compounded by the effects of drought, it is likely that ZiG will face significant difficulties.

The situation outlined above highlights the complex challenges faced by the government in managing the currency crisis. It is important to stay updated with the latest news and developments we provide at Equity Axis to have a comprehensive understanding of the evolving situation.

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