ZiG Distortions Threaten Business

Zimbabwe’s local currency, ZiG, purportedly backed by gold and adequate foreign currency reserves, has now become an unintended catalyst for economic deterioration due to renewed volatility and sharp decline as it threatens the survival of retailers and other businesses at the heart of the economy.

Retailers have expressed grave concerns and fears of closures as the currency wreaks havoc in the market characterised by high macroeconomic instability, inflation and interest rates.

The market is grappling with the problem of a fixed official exchange, emergence of multiple exchange rates and distortions, arbitrage, growing money supply and surging inflation.

The official exchange rate is US1$: ZiG13.8, but the parallel market rate is US$1: ZiG30.ZiG has now lost value by 49% since it was introduced at on 5 April as measured from January on average.

While annual inflation is 3.7% officially, some independent economists say it well over 800% – the highest in the world.

Money supply is around 283% annually, but money velocity is low.

A high velocity of money indicates a bustling economy with strong economic activity, while a low velocity indicates a general reluctance to spend money.

Money authorities sought to throttle monetary supply at the beginning to defend ZiG, while money velocity was low.

ZiG notes are in short supply, meaning the United States dollar still holds sway across the economic landscape.

President Emmerson Mnangagwa says he intends to scrap the US dollar – meaning multi-currency system – and remain with ZiG, at this rate ZiG will spiral to death like all its previous versions – six of them.Mnangagwa extended the use of foreign currency in settling domestic transactions and payment of goods and services until December 2030.

Currency chaos and turmoil sit at the heart of Zimbabwe’s problems.

The Reserve Bank of Zimbabwe (RBZ) under John Mushayavanhu – who has vowed not to print money, but is now forced to do – is trying to micro-manage the economy, currency and exchange rate in a bid to contain inflation through unorthodox economic policies.

Micromanagement of the currency, money supply and inflation has inevitably led to exchange rate distortions, artificially managed currency values, reduced efficiency, and inefficient allocation of resources.

Micromanagement of money supply, first by starving the market and later increasing money supply despite limited bank notes, has brought back inflationary pressures, interest rates distortions, inefficient credit allocation and instability.

Similarly, inflation micromanagement has resulted in unpredictable price volatility and uncertainty for businesses as retailers’ alarm bells show.

The consequences of this has been reduced confidence in monetary policy, inefficient allocation of resources, especially in the foreign currency market, increased risk of a financial crisis, stifling of economic activity and economic instability.

The RBZ should adopt clear and predictable policy frameworks, ruled-based monetary policy measures, not arbitrary interventions and propaganda, a flexible exchange rate, market-driven interest rates, and tackle root causes and solutions.

This situation has created market chaos with many exchange rates and prices in the market.

Retailers have now appealed to government to intervene to change the situation as gheh now face closure.

While authorities claim ZiG has brought currency and exchange rate stability, the market and businesses say it is the opposite:

It has triggered a new bout of economic instability.

Zimbabwe’s mainstream and formal retailers are officially compelled to use an overvalued official exchange rate, sometimes amid threats and arrests, making their products more expensive than those sold in the informal and unregulated market.

The Retailers Association of Zimbabwe (RAZ), which includes giants such as OK Zimbabwe, PicknPay, SPAR, Schweppes, Irvines, Probrands, Colcom, Edgars and Dendairy, among others, say the formal retail sector could collapse due to policy failures, ZiG-induced distortions and instability.

“The situation is clearly untenable and will lead to company closures if authorities do not intervene with policy measures to protect the formal retail sector,” retailers said.

Analysts say ZiG was never going to be a solution to the current economic problems without tackling the root causes of the problem: Politics and leadership.Anaysts have repeatedly said Zimbabwe needa structural reforms aimed at improving the business environment and climate, strengthening economic governance, and reducing corruption vulnerabilities.

Zimbabwe’s economic governance has significant weaknesses and corruption poses risks to macroeconomic performance.

Addressing these weaknesses remain critical for promoting sustained and inclusive growth.International re-engagement is also for debt resolution and arrears clearance, which would open the door for access to external financing.

Currently, government has no meaningful external sources of funding or lines, it is relying on loan sharks and money from the pricate scetor with extortionate charges, for instance those involved in road construction.

They advance funding to the government at extortionate costs.Authorities’ re-engagement efforts, through the Structured Dialogue Platform, are key for attaining debt sustainability and gaining access to concessional financial support.

However, the US, a key player, has retreated from the talks, leaving Zimbabwe isolated.