NATHAN GUMA
SINCE government introduced the new currency Zimbabwe Gold (ZiG) in April, it has been in serious short supply due to policy, administrative and market reasons, monetary sources have explained the current difficulties.
ZiG was introduced on 8 April to replace the fast-collapsing Zimbabwean dollar which was spiraling towards a calamitous death with devastating economic consequences.
That became the sixth variation of the Zimbabwean dollar since 1980. T he International Monetary Fund (IMF) says ZiG is holding firm in the market, despite the need to sustain current monetary measures and adopt reforms.
“The ZiG official exchange rate has so far remained stable, ending a bout of macroeconomic instability in the first three months of the year (when the Zimbabwean dollar depreciated by about 260 percent),” the IMF said.
“Assuming that macro-stabilisation is sustained, cumulative inflation in the remainder of the year is projected at about 7%.
“The mission welcomes improvement in monetary policy discipline and recommends further refinements to the policy framework. Price stability would be best achieved by stabilizing the ZiG nominal exchange rate against a suitable basket of currencies (accounting for the dominant role of the USD in the economy).”
However, ZiG has been in shortage for many reasons. Its use for transactions in the economy is limited, accounting for less 20% of transactions.
A senior monetary authority told The NewsHawks: “There are many reasons why ZiG is scarce in the market and is not being used significantly. The first one is government is running a tight or contractionary money policy to contain inflation. Authorities are using monetary policy instruments, including interest rates, to contain money supply, stabilise the exchange rate and reduce inflation to guarantee price stability. The Reserve Bank of Zimbabwe (RBZ) introduced ZiG, a structured currency, which is generally pegged to a specific exchange rate or currency basket and backed by a bundle of foreign exchange assets (including gold).
“This implies that a Central Bank can only issue domestic notes and coins when fully backed by a foreign “reserve’ currency or foreign exchange assets and that the currency is fully convertible into the reserve currency on demand.
“ZiG is supposedly anchored by a composite basket of foreign currency and precious metals government’s economic policies. RBZ governor John Mushayavanhu (mainly gold) held as reserves for this purpose by the RBZ.
“In the process, this means the RBZ is trying to tie money supply to the monetary base, which creates a mismatch, gaps, bottlenecks and shortages.”
The authority added: “The monetary base of a country is about the total amount of currency that is in circulation or held in the central bank reserves. It’s the quantity of money or currency held in the hands of the public or as commercial bank deposits. The monetary base captures the total banknotes and coins.
“While the monetary base only accounts for the most liquid form of a country’s currency such as banknotes and coins, money supply captures a broader perspective. Money supply represents the totality of a country’s monetary base, including other assets in its less liquid forms.
“To adequately capture the variety of assets, the money supply is categorisd into M0, M1, M2, M3 or M4. The total amount of funds in the monetary base is reported under the lower levels of the money supply.
“Hence, the distinguishing factor between the monetary base and money supply is that while the former accounts for the most liquid assets available for immediate use in a country, the latter accounts for the totality of a country’s assets, including the less liquid ones.
“Now the problem we have here is that RBZ governor John Mushayavanhu and his team are trying to match the monetary base and money supply. They want every ZiG, including a coin, out there to backed by reserves, which is not practical or even possible. “When you do that, the market becomes dysfunctional and currency shortages occur. Not every ZiG out there can be practically backed by reserves.”
Analysts also say ZiG, is in short supply due to low market confidence in the currency and government’s economic policies.
There is also failure to meet public expectations, such as being able to buy fuel and pay customs duty, for instance, in ZiG.
“The issue of confidence, failure to meet reasonable public expectations, lack of understanding of how the new currency works and insufficient educational campaign by RBZ.
“Availability of ZiG banknotes and coins is also part of the problem. Remember some millions worth of ZiG were printed by former RBZ governor John Mangudya, butwithdrawn by his successor Mushayavanhu who did not want to circulate notes signed by his predecessor.”
Government has also been aggressively trying to promote absorption of ZiG by the economy.
This has highlighted policy inconsistency and uncertainty.
President Emmerson Mnangagwa said in Mutare last week government will in less than two years revert to exclusive use of ZiG as legal tender as it cannot continue to transact in the United States dollar, a foreign currency of a hostile nation.
Addressing a gathering at the official commissioning of the Mutare Teachers College Fruit Juice and Water Processing Plant last Friday, Mnangagwa asked why Zimbabweans should continue to use Biden’s “money” when he “doesn’t like you”.
He said his government will vigorously promote use of ZiG across the economy to replace the US dollar – which accounts for over 80% of transactions – beginning in two months’ time and in less than two years nationally so that the US dollar can be phased out.
Mnangagwa said it is hard to use a foreign currency of a hostile country like the US as it can unexpectedly change and act against his Zimbabwean national interest.
His remarks — which highlight his government’s policy inconsistency and uncertainty — are bound to create havoc in the market. Zimbabwe has been battling currency volatility for a long time and recently changed the local unit for the sixth time as it introduced ZiG.
Last October, Mnangagwa extended the multi-currency system to 2030 which is anchored on the US dollar.
The government had previously said that the multi-currency system would end in 2025.
The ZiG official exchange rate has so far remained stable, temporarily ending a bout of macroeconomic instability in the first three months of the year when the old Zimbabwean dollar depreciated by about 260% as the country plunged into currency volatility amid exchange rate-driven surging inflation and turmoil.
