June will possibly come before June

THE beginning of last week was uncharacteristically chilly and nippy that many raided their wardrobes for those jackets that are normally used in winter to keep the cold at bay.

This is unusual during this time of the year in our teapot-shaped Republic.

But a lot has been unusual about the weather in recent years.

The experts say this is because of climate change. It is hard to disagree, especially after the unseasonal deluge that submerged swathes of the United Arab Emirates, particularly Dubai, last week, which some described as “apocalyptic”.

It is believed the heavens dumped about 25 centimetres of rain, which is roughly twice the emirate’s yearly average, in a single day.

Incredible!

These are really signs of the times, which even become starker in view of the fallout from the El Niño-induced drought that affected the 2023/2024 summer cropping season.

But it is not Bishop Lazi’s intention to bother you with a seeming lecture on the vicissitudes of climate change.

This instalment is actually about the new currency, Zimbabwe Gold (ZiG), which was unveiled by the new Reserve Bank of Zimbabwe (RBZ), Dr John Mushayavanhu —  or John the Second — on April 5 this year.

Rarely does the Bishop dwell on a single subject for successive weeks, but this time he feels duty-bound to warn a small clique of market players that seems to be betting against ZiG.

Over the past 16 days since the new gold-backed currency was introduced, it has continued to firm on the interbank market in sympathy with soaring prices of the metal on the international market.

However, there is a small group of individuals and corporates that have been discounting ZiG with the expectation that it will suffer the same fate as the Zimbabwe dollar by, sooner rather than later, precipitously declining in value. In their wisdom, or lack thereof, they have been coming up with wild exchange rates for the new currency, for example, US$1:ZiG15, which is ridiculous, but not unexpected.

The lingering trauma of hyperinflation is real.

It was also made worse by the occasional bouts of price and exchange rate volatility in recent years, which unfortunately drove up prices and continued to feed into fears that the Zimbabwe dollar could not be trusted as both a reliable store of value and medium of exchange.

Unfortunately, this seriously dented the people’s confidence in the central bank, one of whose core mandates is to keep inflation in check and defend the value of the local currency.

John the Baptist: Voice in the Wilderness

But ever since taking over the reins, John the Second has clearly been on a crusade to promote his new baby — ZiG — before he knuckles down to the onerous, hard work at the RBZ.

His pitch has mainly centred on the need to restore public trust and confidence in banking in general and the central bank in particular.

And like John the Baptist, he has been that voice in the wilderness calling for people to begin to believe again.

You see, when Jewish leaders in Jerusalem sent priests and Levites to ask John the Baptist who he was, he replied in the words of Isaiah the prophet: “I am the voice of one calling in the wilderness, ‘Make straight the way for the Lord.’” (John 1:22)

And John the Second has been preparing ZiG for a smooth landing.

“The people need to trust in the banking system again so that they save and bank their money again,” he said at a breakfast meeting in Gweru on Tuesday.

“So, I am saying there will not be any room for excessive printing of money because that causes inflation.

“Under my watch, there is not going to be any printing of money in excess of the gold that the central bank has.

“That’s a cardinal rule at the central bank and we have systems that we are putting in place to make sure that we don’t break that cardinal rule. If that happens under my watch, please crucify me.”

Quite strong words coming from the governor.

Winter is here!

The central bank is confident that it has introduced a stable currency, which is true thus far. In fact, it is convinced that the ZiG will strengthen even further, potentially causing deflation (the general decline in prices).

It does not take rocket science to explain how this might possibly happen.

The value of the local currency that was circulating in Zimbabwe before April 5, when ZiG was introduced, amounted to only US$80 million. And in its vaults, the RBZ holds in excess of US$285 million, which gives it the wherewithal to defend ZiG by either buying the local currency circulating in the economy in order to strengthen its value or releasing it to the market to control its value.

So, in short, this means the apex bank now has the ability to intervene in the market when it feels that the local currency is under attack, which is what central banks ordinarily do anyway. Our reserves are, however, not static.

Mining companies will continue to pay royalties in kind, meaning our reserves will continue to grow, giving more muscle to the monetary authorities.

There is also another interesting dimension.

Remember, the local unit in circulation was only worth about US$80 million.

In June, companies are expected to pay half their tax obligations in the local currency.

And here is where it gets interesting.

Treasury usually collects taxes worth US$300 million during this time of the year.

So, put simply, half — about US$150 million — should be paid in the local currency.

This means US$150 million will be chasing after U$80 million worth of ZiG.

Considering the demand-and-supply dynamics, the outcome of this scramble for ZiG is quite predictable.

And this is what makes John the Second more than certain that the local currency will strengthen in value, whether we like it or not.

This is also why Bishop Lazarus believes the speculators will have their fingers burnt.

But June might arrive before June.

In view of the possible liquidity crunch, companies will find it prudent to pre-emptively build ZiG stocks well ahead of the June quarterly payment date.

So, the forecast incremental demand for the local currency will likely have an impact on its value and seismically change both sentiment and behaviour.

What does the future hold for ZiG?

But how is ZiG different from the Zimbabwe dollar and how will it fare going forward, especially as an instrument that is likely to lead Zimbabwe’s exit from the grip of the multicurrency system, which is, however, dominated by the US dollar?

Many Latin American countries have been finding it increasingly difficult, if not impossible, to ditch their addiction to the US dollar.

Dedollarising is clearly difficult.

Well, what makes ZiG unique is the fact that it is anchored in gold, which has endured as a medium of exchange and store of value for centuries; even centuries before the US started to mint the US dollar in 1793.

Some believe gold was widely used as a currency from as long back as 500BC.

So, backing ZiG and linking it to gold makes our local currency as good as gold. Literally!

Over the past couple of weeks, the Bishop has been at pains to explain that it is not the little men and women who sit at street corners trading currency that will influence the value of the local unit.

The actions of the central bank going forward will determine ZiG’s fate.

It is instructive that the world over, countries are gravitating towards gold-backed currencies and are progressively ditching the US dollar because it is now being weaponised by Washington.

We in Zimbabwe have learnt this lesson all too well.

We cannot afford to let ZiG fail.

If gold rusts, what shall iron do?

Bishop out!