Zimbabwe’s latest attempt at stabilizing its currency — the ZiG, or Zimbabwe Gold — is bound to fail, as policy mistakes push it into obscurity, the country’s longest-existing independent brokerage stated.
In a bleak assessment, Imara Asset Management CEO John Legat and Chief Investment Officer Shelton Sibanda cautioned that the ZiG is headed for extinction, not by way of precipitous devaluation, as in the instance of previous local currencies, but by way of non-use in the country’s economy.
“The ZiG is racing towards extinction,” they wrote in a client note, pinpointing a six-month liquidity deficit as a key factor in the currency’s decline. The brokerage estimates that 80% of all payments in Zimbabwe continue to be in foreign currencies, the majority of which is the U.S. dollar, and that the South African rand also accounts for a portion of payments.
The ZiG, launched over a year ago, was set to be the sixth attempt at establishing a workable local currency by Zimbabwe since 2009, following a string of failed attempts that culminated in the collapse of the Zimbabwean dollar due to hyperinflation. This time, the new money is supported by gold bullion and foreign exchange reserves by the central bank. However, as much as government has tried to market the currency, Zimbabweans are not yet convinced, its value constantly decreasing.
Liquidity crisis deepens
Imara managers attribute a severe liquidity constraint as the overarching issue crippling the ZiG. Failure of the currency to remain liquid in the market, especially in the parallel (black) market, has led individuals and businesses to hold on to foreign currencies like the dollar. Although Reserve Bank of Zimbabwe monetary policy committee member Persistence Gwanyanya has contended that ZiG liquidity is only tight on the informal market, the fact remains that the currency is yet to make any headway in the formal economy. Gwanyanya further stated that the reversal of U.S. dollar positions into the ZiG may ultimately unlock credit into the economy, but this is yet to happen.
Increased Use of Dollars
Since the introduction of the ZiG, the Reserve Bank of Zimbabwe has tried to calm the currency by raising interest rates. But in doing so, they have inadvertently increased the popularity of dollar use, as Zimbabweans and companies want the security of foreign money as inflation rises.
Imara’s executives argue that monetary policy alone will not solve Zimbabwe’s economic challenges. “What is needed is a comprehensive plan to boost government revenue, control deficit spending, and rebuild confidence in the currency and economy,” they said.
Imara’s executives argue that monetary policy alone will not solve Zimbabwe’s economic challenges. “What is needed is a comprehensive plan to boost government revenue, control deficit spending, and rebuild confidence in the currency and economy,” they said.
Calls for scrapping the ZiG
In light of the growing issues, Imara’s managers suggested that it would be better for the government to abandon the ZiG altogether. They argued that additional support for the currency might turn out to be useless if Zimbabwe cannot generate the confidence and liquidity needed for its survival. “It would be better just to scrap it and move on,” they summed up.
As Zimbabwe continues to be plagued by its moribund economy, hyper-inflation, and widespread dollarization, the ZiG’s future is on the balance. With growing skepticism of its viability, the country can once again look forward to facing a difficult reckoning with regards to its money policy and currency alternatives.
