• ZiG declined 0.2% week-on-week to 26.4565 as of 14 February 2024
• The Reserve Bank of Zimbabwe maintained a 35% borrowing rate to control liquidity
• Parallel market rate improved from ZWG50 to ZWG35, indicating currency strengthening

Harare — The Zimbabwe Gold (ZiG) has exhibited a consistent downward trajectory, recording a decline for three consecutive weeks, settling at 26.4565 during the week ended 14 February 2025.

However, these are steady declines with the latest of 0.2% week-on-week from 26.4072 on 7 February 2025.

The marginal depreciations are due to the stringent monetary policy implemented by the Reserve Bank of Zimbabwe aimed at controlling ZWG liquidity in the market.

In his latest Monetary Policy Statement on the 6^th of February 2025, Dr. John Mushayavanhu announced a series of measures, including maintaining the borrowing rate at an elevated 35% for the second consecutive period while the bank has standardized Statutory Reserve Requirements at 30% for demand deposits and 15% for savings and fixed deposits, thereby reinforcing tight liquidity conditions and helping to regulate money supply and curb inflation.

In response to these measures, the parallel market rate has shown a favourable adjustment, decreasing from a peak of ZWG50 per dollar in November 2024 to ZWG35 in January 2025 on peer-to-peer markets, and averaging 37 ZWG using the mid-rate.

A premium of 37% indicates that the currency is trading at a significantly higher value in the parallel market compared to the official exchange rate. However, the narrowing of this premium suggests a strengthening of the currency in the parallel market.

Typically, low premiums ranging from 0% to 10% are indicative of a healthy currency, reflecting a close alignment between official and market rates and instilling confidence in both the currency and the economy.

Conversely, moderate premiums between 10% and 20% may signal underlying economic concerns, though they are not necessarily alarming, indicating that market participants might possess a less favourable outlook on the currency relative to official valuations.

High premiums, exceeding 20%, are often seen as red flags, reflecting a lack of confidence in the currency or elevated liquidity conditions. This disparity suggests a significant gap between market perceptions of the currency's value and the official exchange rate.

The government's historical approach, particularly since the introduction of Bond Notes and the subsequent transition to RTGS (later termed the Zimbabwe Dollar), has not aligned with market realities.

The continuous injection of liquidity into the market has distorted demand for ZiG relative to its actual supply, exacerbating the divergence between parallel market rates and the official rate.

The Mushayavanhu administration is attempting to reverse this trend through rigorous monetary policy, but the sustainability of this approach remains in question.

The government must adopt fiscal discipline, aligning expenditures with revenue, and reevaluating projects that could destabilise money supply, including infrastructure initiatives and excessive perks for ‘public sector’ workers.

Creating robust demand for the local currency is crucial, particularly by mandating that all taxes be paid in local currency. This strategy would enhance demand and stabilise its value against the US dollar.

Lastly, it is imperative for the government to refrain from reactionary policies affecting the ZiG.

Engaging with the business community in an objective manner before implementing potentially destabilising measures or sudden currency devaluations is advisable for fostering economic stability.

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