- Currency Crisis Deepens: ZiG, depreciates 50% since inception
- Economic Fundamentals Weak: Consumption-driven economy, lack of fiscal discipline, and debatable reserves…
- Parallel Market Concerns: Surge to above 40 per dollar, highlighting the RBZ's struggle to control the foreign exchange market
Harare- Zimbabwe's local currency, the Zimbabwe Gold (ZiG), traded at 26.8596 on the 18th of October, down from ZiG26.0692 traded last week Friday against the US dollar.
This continues its downward spiral, having depreciated by 50% since its inception at 13.56. Since its devaluation two weeks ago, the ZiG has lost 11% of its value.
The ZiG's devaluation two weeks ago from 13.9 to 24 exposed the Reserve Bank of Zimbabwe's (RBZ) incompetence.
Instead of being proactive, the RBZ reacted to the parallel market, allowing it to set the pace.
This move also highlighted the disputed reserves backing the ZiG.
The overnight devaluation eroded trust in the currency, prompting individuals to convert their ZiG deposits to US dollars promptly whenever they obtain them.
The parallel market rate has surged to 40 per dollar, with some rates closely approaching 45-50.
This raises questions about the RBZ's next move, particularly given the 41% disparity between the official and parallel rates in just two weeks, is it going to react and deflate again?
The ZiG's struggles stem from the government's failure to manage supply and demand. Excessive money printing to fund suppliers and now free inputs to farmers has flooded the market with ZiG, reducing demand.
Zimbabwe's underlying economic issues, which led to the demise of previous currencies, remain unaddressed.
The country lacks fiscal discipline, and its reserves are debatable.
Royalty payments and projected reserves do not align, casting doubt on the ZiG's backing.
Furthermore, Zimbabwe's consumption-driven economy, rather than a creation-based one, undermines the local currency.
The government's reliance on the US dollar for critical services, such as rentals, fuel, and passports, reduces demand for the ZiG.
Expert advice, such as Professor Mugano's suggestion to dollarize for at least five years while rebuilding currency fundamentals, seems increasingly pertinent.
The ZiG's depreciation has far-reaching implications.
A weakening currency will increase import costs, fueling inflation and reducing purchasing power.
The ZiG's instability will deter foreign investment, hindering economic growth. As the currency depreciates, the cost of living will rise, exacerbating poverty and inequality.
The government's ability to meet its obligations, including salaries and social services, will be compromised.
Zimbabwe's reliance on the US dollar will continue to undermine its economic independence.
To mitigate these risks, the government must adopt a comprehensive economic reform agenda.
Key reforms should focus on fiscal discipline and effective reserve management, diversifying the economy to reduce consumption and increase production, enhancing investor confidence through policy consistency and stability, implementing structural reforms to improve the business environment, and promoting export-led growth to stabilize the currency.
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