- Reserve Growth: Reserves have almost doubled in just seven months to US$509 million
- Formal Market Appreciation: The local currency is appreciating in the formal market, showing month-to-date gains of 8.3%
- Parallel Market Concerns: The parallel market continues to trade at about 40-45 ZiG per US dollar, creating a significant premium of 72% based on a mid-rate of 43
Harare- The Reserve Bank of Zimbabwe (RBZ) announced that the reserves backing the Zimbabwe Gold (ZiG), the fourth currency introduced in nearly a decade, have surpassed US$500 million, reaching US$509 million.
When the ZiG was introduced in April, the government claimed to have backed it with US$285 million, reserves we questioned in various publications based on our projections regarding when the government started taking gold and precious minerals as reserves.
However, the latest figure means reserves have almost doubled in just seven months, which could have strengthened the currency.
In an interview with the state publication, The Sunday Mail, RBZ Governor John Mushayavanhu highlighted that this figure contrasts sharply with the equivalent of ZiG 129 million in circulation.
“Currently, the total reserve money in local currency as of November 6, 2024, is about ZiG 3.4 billion, which is about US$129 million, against foreign currency reserves of US$509 million.
“The Reserve Bank’s total foreign currency reserve holdings of more than US$500 million as of November 1, 2024, are also more than the total bank deposits in the domestic currency of about ZiG 12 billion,” RBZ Governor John Mushayavanhu said.
This notable increase in reserves comes at a time when the local currency is also appreciating in the formal market, showing month-to-date gains of 8.3%.
RBZ attributes this appreciation to tight liquidity due to a rise in interest rates to 35%, with statutory reserve requirements set at 30% for both demand and call deposits in local and foreign currencies, and 15% for savings and time deposits.
The RBZ has claimed that since April 5, 2024, it has consistently maintained more than enough reserves to back the ZiG currency and ensure its stability.
However, ZiG’s stability remains more theoretical than practical, as it continues to firm in the formal market but runs sideways in the market forces-determined parallel market.
Reserves are typically used to stabilize a currency during shocks caused by mismatches between local and foreign currency supply and demand.
While the ZiG is appreciating in the formal market, the parallel market continues to trade at about 40-45 ZiG per US dollar, compared to an average of 25.5 ZiG per dollar in the formal market, creating a significant premium of 72% based on a mid-rate of 43.
In late September, instead of utilizing reserves to maintain stability when the local currency plummeted to 35 per dollar in the parallel market—with suppliers quoting the rate of 32 per dollar against a formal rate of 13.9, creating a premium of over 95%, reminiscent of the conditions that led to the collapse of the previous Zimbabwe dollar—the government opted for a devaluation of the ZiG instead of injecting reserves.
Infact, reserves were injected but they were not enough as they failed to make any difference.
After the devaluation, the parallel rate shot to 40 and is now trading around 45, and the ZiG is once again appreciating.
The issues surrounding the ZiG extend beyond just reserves, however.
Fundamentally, it is a flawed currency that fails to act as a reliable measure of value or store of wealth.
In such circumstances, individuals receiving the currency often turn to the black market in search of a more stable alternative, exacerbating the situation and driving exchange rate volatility higher.
Furthermore, public confidence in the currency is critically low. The abrupt 43% devaluation of the ZiG in late September led to significant financial losses for both businesses and individuals, eroding public trust.
As a result, holders of ZiG deposits are quick to convert them into more stable currencies, further fuelling parallel market activities.
Reserves should create stability, and when they do not, then what purpose do they serve?
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