Balancing de-dollarisation and ZiG stability

Persistence Gwanyanya

WHILE currency volatility is generally concerning, there is a good explanation to the current scenario.

The emerging shocks on the alternative market for Zimbabwe Gold (ZiG) are arguably a reflection of faster-than-expected de-dollarisation.

Interestingly, de-dollarisation is the policymakers’ ultimate objective.

A fast-paced scenario, like we are currently experiencing, can be overwhelming, posing a risk to stability and thus calls for urgent intervention.

Since its launch on April 5, 2024, ZiG has experienced widespread acceptance.

The results from a recent consumer perception survey by the Reserve Bank of Zimbabwe (RBZ) indicate a phenomenal increase in ZiG acceptance, from 61 percent in May to 80 percent in June and 91 percent in July.

Unsurprisingly, the economy experienced a remarkable reversal of dollarisation levels from around 85 percent in April to the current levels of around 60 percent.

It appears de-dollarisation is unravelling faster than policymakers expected.

RBZ Governor Dr John Mushayavanhu is on record indicating that if dollarisation is reduced to 70 percent by year-end, 60 percent in 2025 and 50 percent in 2026, we would be in a good space towards de-dollarisation.

However, faster-than-expected de-dollarisation has meant increased ZiG in circulation, which, to minimise occurrence of shocks, should ideally be underwritten by both monetary and fiscal legs.

By underwriting de-dollarisation, the RBZ should normalise timeous intervention in the interbank market, while Treasury should aggressively drive demand for ZiG. This is arguably the most sustainable way to manage potential shocks from de-dollarisation. The essence of structuring our currency around international reserves is to guarantee its convertibility through timeous interventions by the RBZ in the interbank market.

While the RBZ has been injecting forex in this market since launching ZiG, there is arguably a need to sterilise what seems to be excessive ZiG use in the market by injecting more forex.

Out of the US$190 million that has been traded in the interbank market since the launch of ZiG, the injection of US$50 million by the RBZ has had a significant impact on stability, giving us hope that such lump sum injections can reverse current volatilities and anchor inflation expectations going forward.

It is quite comforting that the country has adequate reserves to anchor our currency.

At US$375 million, international reserves provide about four times the cover to the ZiG reserve money.

While there may be fear of depleting the reserves through aggressive intervention, an impactful intervention that adequately anchors expectations will make a huge difference.

As they say, success breeds success.

ZiG is seen as bringing more convertible demand for forex, especially for domestic transactions.

The store of value is expected to drastically fall, anchoring stability.

On the other hand, while the fiscal authorities have committed to underwriting ZiG, there is now a need to act urgently.

Fiscal authorities should intervene through aggressive demand for ZiG.

The fiscal leg is expected to weigh in through increased ZiG taxes and duties, among other statutory payments, as indicated by the Minister of Finance, Economic Development and Investment Promotion, Professor Mthuli Ncube, in his recently announced Mid-Term Fiscal Policy Review statement.

This month, we expect 50 percent of the third-quarter QPDs (quarterly payment dates) to be paid in ZiG.

This will arguably drive demand for the local unit and reduce pressure on foreign currency.

Already, all Government user fees are now payable in ZiG.

Going forward, we expect Treasury to increasingly and aggressively pivot towards ZiG in all statutory transactions.

This will also boost confidence in ZiG and guide the market towards de-dollarisation.

Admittedly, emphasis on the Government playing a key role in de-dollarisation appears inconsistent with the tenets of a private sector-led economy.

However, this largely reflects the structural weaknesses of a multiple-currency regime, which tends to create market failure.

It appears the RBZ is the only willing seller of forex in the interbank market, which operates on the willing-buyer, willing-seller principle.

We call this a seller’s market and arguably arises from the fact that the use of forex is legally permissible for local transactions, which reduces the incentive for voluntary liquidation.

Unsurprisingly, there has been very low activity on the interbank market at a time when the banks are sitting on US$2 billion in deposits.

Arguably, this structural weakness also explains the inefficient price discovery, from which the RBZ is wrongly blamed for controlling the exchange rate.

It should now be clear why I argue that the RBZ should normalise interventions in this inefficient interbank market.

It should also be clear now why the Government, more than any other player, should drive the demand for ZiG.

Importantly, it should be clearer now why the authorities argue that there is urgency to migrate from the multiple-currency regime.

Now, the easiest and most effective yet difficult way to de-dollarise is to create supportive conditions, which, importantly, our policymakers have rightly identified.

These include balancing the budget, building forex reserves, reindustrialisation and reducing unemployment and informalisation.

While itself also a notable driver of instability in our country, the pace of infrastructure development is worth noting.

Few countries can manage the infrastructure development we have achieved with limited access to international financial markets.

To rebuild infrastructure, we sacrificed a lot, including stability.

Importantly, despite our aggression on infrastructure, stability remained moderate, which is unlike in the past.

As such, with hindsight, one always takes the view that the sacrifice was worth it.

By investing in infrastructure, we invested in future production and productivity.

Our infrastructure is now attracting investment in mining and construction sectors, mainly. Interestingly, we are starting to see the emergence of new and modern industries, which will support the reindustrialisation imperative.

All these are seen as supporting economic resilience.

Despite the severe drought and depressed mineral prices this year, our economy is expected to grow by over 2 percent, with improved growth of 6 percent projected in 2025.

Also comforting is that, despite fiscal pressures from the highlighted external shocks, the performance of the fiscus has remained within budget, with the Government only expending 44 percent of the budget by half-year.

As such, and to the surprise of many, there has not been a supplementary budget this year, which speaks to the fiscal prudence necessary to support currency stability.

Importantly, the external sector has continued to perform despite challenges.

Total foreign currency inflows of US$6,5 billion in the first six months of the year represent a 10 percent increase from the previous year.

The country is expected to generate a current account surplus for six consecutive years since 2019 this year as its forex-generating capacity continues to improve.

Now, given the structural weaknesses of the multiple-currency system, exclusion in the international financial markets, as well as our history that affected confidence in our currency and financial markets, we need to balance growth and stability imperatives. Timeous interventions are necessary.

As l have indicated, the good news about the current shock on stability is reflective of de-dollarisation unravelling.

Also quite comforting is that the current shocks are manageable.

That is why l take the view that these volatilities are a performance punishment that we are happy to contend with.

 Persistence Gwanyanya is an economist, chartered banker and a member of the RBZ Monetary Policy Committee. He is also a founder, futurist and vision consultant of Bullion Group International. For feedback: email [email protected]