- Stormy start to August: ZiG has continued its downward spiral
- Widening gaps between official and parallel rates continues
- There are gaps concerning reported and actual reserves
Harare- The Zimbabwe Gold (ZiG) has recorded a poor performance in July 2024. It started trading in April 2024 at a high of 13.56 per US dollar, but by the end of July 2024 had fallen to 13.79 per dollar. This downward trend is concerning and suggests a continued weakening of the currency given lower demand for the local currency.
ZiG has started August 2024 on a similarly weak note, trading at 13.80 ZiG per dollar, a higher exchange rate than the 13.79 rate at which it closed July. This has resulted in cumulative losses of 2.2% for the ZiG since its inception.
Despite initial optimism around the ZiG, it is struggling to gain traction practically, much like the Bond currency before it.
The decline in the ZiG's value coincides with a period of heavy government spending on construction and infrastructure projects. In the first six months of 2024, the Ministry of Transport spent ZiG4.2 billion , including 1.4 billion on road projects and 1.1 billion on the Emergency Road Rehabilitation Programme.
This increased spending, coupled with low levels of gold and US dollar inflows, may have contributed to the upward pressure on the exchange rate.
In this article, https://equityaxis.net/post/17997/2024/7/zig-s-harrowing-dance-with-devaluation-exposing-cracks-in-currency-reserves, we explored the effects of government’s reported gold reserves versus actual reserves leading to ZiG failure.
In an effort to stabilize the currency, the government last week injected US$50 million into the foreign exchange market, a meausre likely to cool the rates in the short-term.
The fate of the ZiG however, lies in the government's ability to build up sufficient gold reserves to support the currency. Stock of reserve money increased by 32% as of May while broad money stock by 5.8^ amid low reserve inflows.
Authorities are currently cracking down on illegal money changers, but this is unlikely to solve the underlying demand for US dollars, as many basic services like fuel and rentals are still priced and paid for in US dollars while civil servants and workers in the private sector handsomely paid in local currency, forcing individuals to turn to the black market.
The government's mid-term budget has introduced some measures to encourage the use of the ZiG, such as requiring its use for all presumptive taxes and government services.
However, fuel and passports are still required to be paid for in US dollars, undermining these efforts.
To stabilize the ZiG, the government will need to practice strong monetary discipline, ensuring that the money supply is not exceeding the actual level of reserves, while building up on more reserves and expanding ZiG's reach in the market.
According to RBZ governor, there has been an increase in the uptake of ZiG WITH THE CURRENCY NOW ACCOUNTING FOR 30% in the market up from 15% in April.
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