• Government has taken a heavy-handed approach, arresting participants in the informal forex trade
  • But this has failed to address the underlying demand for US dollars to facilitate essential economic transactions, which ZiG is unable to meet
  • As a result, the ZiG's performance has been disastrous, potentially making it one of the worst currency introductions in recent memory

Harare- During the last week of May, we continued to monitor the movement of the ZiG currency against other currencies in both the government-regulated formal exchange rate and the market-determined parallel exchange rate.

By June 5th, the ZiG currency will be two months old since its introduction. This initial period has not been kind to the new currency.

The ZiG was introduced on April 5th, 2024 at an exchange rate of ZiG13.56 to the US dollar. By the end of May on the 31st, the official exchange rate had appreciated slightly to ZiG13.3177, a 2% gain over the first two months.

However, despite this modest appreciation in the formal market, the ZiG still cannot be used to pay for many basic necessities. Rents, passport fees, licenses, airline tickets, apparel, cell phones, and various capital goods continue to require payment in US dollars rather than the local currency.

This raises the question - if the ZiG cannot be used for these fundamental transactions that should drive up demand, what is actually fueling the demand for the new currency?

The answer to this query is crucial for understanding the trajectory of the ZiG in the weeks and months ahead.

The answer is simple - the government is artificially pegging the official ZiG exchange rate, a dangerous economic tool that will only serve to worsen public unpopularity of both the currency and the government's policies.

This has already eroded confidence in the new currency.

Of all government currency gambles, this is the worst of all compared to Bond, RTGS, ZWL over the decade.

Due to the command economics approach, the public has developed a complete lack of interest in the government's policies surrounding the ZiG.

Instead, the market-determined parallel exchange rate continues to show a disappointing performance for the ZiG - a trend the government is actively trying to conceal.

The peg on the official rate has allowed the informal foreign exchange market to thrive. The central bank claims to have $285 million in reserves, but this appears insufficient to meet the high public demand for US dollars.

As a result, businesses and individuals are flocking to the parallel market to obtain the "real" foreign currency needed for basic transactions, rather than relying on the government-controlled rate.

This growing divide between the official and parallel exchange rates highlights the government's inability to defend the value of the ZiG.

The public's lack of confidence and the currency's poor performance on the unregulated market suggest the government's efforts to prop up the exchange rate through pegging are proving ineffective.

Since the ZiG's introduction on April 5th, the performance in the formal, government-regulated exchange market has differed significantly from the parallel, market-determined rates.

In the formal market, the ZiG has appreciated by around 2% over the initial two-month period, trading in the 13 region against the US dollar.

However, the story is quite different in the parallel markets. On peer-to-peer platforms, the ZiG has depreciated by a staggering 36%, trading in the 19-21 range per US dollar.

Looking at the broader parallel market, encompassing both peer-to-peer and other informal exchange channels, the ZiG's weakness is even more pronounced.

Here, the currency is trading between 21-23 per US dollar, representing a total depreciation of 43% from the initial introduction rate.

This stark contrast between the modest appreciation in the regulated market versus the substantial depreciation in the parallel, uncontrolled markets highlights the growing disconnect between the government's efforts to manage the ZiG's value and the market's true assessment of the currency.

The parallel market rates suggest a severe lack of confidence and demand for the ZiG compared to the US dollar.

The government has attempted to intervene and crack down on the parallel foreign exchange markets, using police force to arrest street-level currency traders. However, these heavy-handed tactics have had limited success.

This is because the fundamental driver of the parallel market is the basic needs of the population - things like paying rent, buying clothes, and covering medical bills.

These everyday transactions require access to foreign currency, which the official, regulated market is failing to provide.

Zimbabwe's economy remains highly informalized, so the government's efforts to crush the black market through force alone are proving ineffective.

The currency imbalance is driven by the real dynamics of supply and demand, rather than something that can be corrected purely through coercive measures.

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