Central bank renews hope in Zimbabwe’s currency

Persistence Gwanyanya

THE new Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mushayavanhu, has given Zimbabweans a chance to hope again.

The Monetary Policy Statement (MPS), which his predecessor Dr John Mangudya and the Monetary Policy Committee (MPC) has been perfecting over time, is a masterstroke.

The new currency, Zimbabwe Gold (ZiG), which is backed by precious minerals, is definitely a game changer.

It is expected to address the import requirements, as well as value-preservation needs of society, key attributes that previous currencies fell short of.

Fully backed by foreign currency and precious mineral reserves, ZiG has had a good start.

As at April 5, we had $2,6 trillion of reserve money, which converts to about US$90 million at the going interbank rate of US$1:$33 903.9916, which is fully backed by US$285 million reserves of precious minerals (US$185 million) and forex reserves (US$100 million).

It gives us renewed confidence that reserves that are backing ZiG were actually inspected by President Mnangagwa during the handover-takeover process between Dr Mangudya, the outgoing RBZ chief; and Dr Mushayavanhu, the incoming governor.

This attests to the seriousness of the currency project and the support being rendered by the top leadership of the country, which is necessary for success.

ZiG is not a new product.

It evolved from gold tokens that were introduced on July 25, 2022, before evolving into digital gold tokens and ZiG, which was then a value-preservation instrument with transactional capability.

These instruments remain to offer the value-preservation needs of society.

Clearly, the RBZ has been perfecting this product over time. This gives us renewed confidence in the final product, ZiG.

Because ZiG is backed by precious minerals, its price is linked to gold prices, which, together with its convertibility, makes it an acceptable currency for international payments.

Simply put, starting tomorrow, you can walk into a bank and request to make a foreign payment and the financial institution will effect it.

This is easy to understand, as RBZ has forex reserves, which can be sold to the banks to meet their clients’ foreign payment requirements.

Even if all the clients walk in on Monday to demand foreign currency for external payments, the RBZ should be able to meet this requirement, noting that the total ZiG in the economy is only US$90 million and our reserves are 3,5 times that amount.

The question of import cover does not arise as we are in a multiple currency regime, with more than 80 percent of all local transactions now in foreign currency and banks holding large sums of forex in the foreign currency accounts (FCAs) — US$2,5 billion as at April 5, 2024.

The trick now is to ensure that we close all channels of ZiG supply growth, which Dr Mushayavanhu assured the market will not happen under his watch.

Now, because the conversion rate of the Zimbabwe dollar to the US dollar at the launch of ZiG was almost similar to the parallel market rate of US$1:$34 000, it is irrational for one with a bona fide import requirement to secure hard currency from the parallel market.

Why waste the scarce ZiG by buying expensive forex when a cheaper option is available?

Even if it is for domestic requirements, there is enough forex for all businesses to accept ZiG, including for purchase of fuel.

Service stations that accept ZiG will be able to access forex from their bank for the importation of fuel.

Remember, we only have US$90 million worth of ZiG, which is fully backed by foreign reserves.

A stable ZiG will address the value-preservation needs of the market and reduce demand for forex.

There is only US$90 million worth of ZiG to sponsor the forex demand in the economy and the RBZ chief is committed to a tight monetary policy.

The fact that ZiG prices change with prices of gold actually increases its appeal, as the precious metal is currently strengthening and has outperformed paper currencies since the gold standard.

Gold is seen as a viable alternative to the US dollar.

The abandonment of the forex auction system in favour of the interbank market system is seen as fostering efficiency in the forex market.

It is commendable that the 25 percent export surrender system remains to liquify the interbank market.

The RBZ’s role in the purchase of export surrender has been refined to managing the market, with funding of the 50 percent share of the surrender now provided directly by the forex buyers.

The Government is equally expected to provide funding for the 50 percent allocation of the export surrender for the nation’s strategic requirements, which is necessary to plug all possible channels of ZiG growth from the structure of purchase of export surrender.

The adjustment of the bank policy rate for ZiG to 20 percent from 130 percent is not thumbsuck as some analyst believe, but is in line with the recalibration of the Zimbabwe dollar into ZiG.

It is actually in line with the monetary policy thrust to maintain positive real interest rates.

At this interest rate, the monetary policy remains tight and ZiG credit creation is expected to be managed in line with growth of the economy.

Importantly, RBZ acknowledges the need to revive a saving culture by regulating deposit rates and transactional charges.

It is relieving that ZiG savings and demand deposits are now attracting interest rates of 9 percent and 7,5 percent below the bank facility rate, which is now at 12,5 percent.

More relieving is that banks are not supposed to charge account maintenance fees on accounts with balances of US$100 and below or ZiG equivalent as this was a notable disincentive to banking.

This monetary policy is strongly supported by the fiscal leg.

Fifty percent of income tax (QPDs — quarterly payment dates) are now payable in ZiG and this is about US$150 million.

It is easy to see why we expect ZiG to firm significantly towards June as businesses prepare to pay QPDs.

However, the golden rule remains, as per his commitment, that no monetary expansion shall be tolerated.

It is comforting to learn that the RBZ has offloaded all quasi-fiscal activities, which was a possible channel of monetary expansion.

It will be remiss to conclude without emphasising why it was necessary to delay the MPS.

This allowed the monetary authorities to do the necessary consultations, secure buy-in and support of key stakeholders, and put all the ingredients for a successful monetary policy in place.

The wait was necessary as the results shall reveal.

The conversion rate of ZWL to ZiG of ZiG1:$2 500 has a clear and accurate mathematical formula.

It is driven from the understanding that ZiG1 is equal to one milligramme of gold, which costs US$0,07373 at the time of conversion.

This can be converted to US$1=ZiG13,56.

Then, to convert ZWL to ZiG, you simply divide the ZW$33 903,9916 by ZiG13,56 to get ZiG1=ZWL$2 500.

As we configure our monetary system into ZiG, all Zimbabwe dollar-denominated prices, debts, loans, treasury bills and forex auction outstanding obligations, as well as obligation from purchase of 25 percent surrender, will be divided by ZWL$2 500 to get the ZiG values.

For example, ZW$1 million will convert to ZiG400.

Clearly, this is not arbitrary like what some analysts want us to believe. That is why the monetary authorities had to take their time in creating the monetary policy.

Whilst confidence remains the elephant in the room, it is important to emphasise that emotions need to be tempered.

Even if you lack confidence in ZiG, you will have to look for it if Government demands its taxes in ZiG, and they have started with QPDs.

ZiG growth will only be tolerated as reserves increase. The RBZ will continue to build reserves from payment of royalties and purchase of surrender money, which, as I indicated earlier, will have to be funded from Treasury.

The RBZ has already appointed auditors to verify and confirm our reserves for the comfort of the market, including the international community. For now, all l can say is it is not advisable to win by arguments, but results.

Let us see how ZiG performs, but personally, I am more confident and hopeful about the effectiveness of ZiG to solve of currency challenges. Stability will definitely support the continued growth of Zimbabwe’s economy.

Persistence Gwanyanya is the group CEO of Bullion Group International and member of the RBZ Monetary Policy Committee. Feedback: [email protected]