Sloppy ground for the ZiG: Will RBZ win the market?

By Zvikomborero Sibanda | May. 17, 2024

Zimbabwe’s agriculture sector is predominantly rainfall-dependent. Statistics show that roughly a paltry 6% of total arable land is under irrigation.

LAST week, I highlighted the reasons behind the significant plunge of Zimbabwe’s ‘new structured currency’ in alternative (parallel) markets despite its young age of just one month.

The largely informal economy continues to show a growing preference for the greenback over the Zimbabwe Gold (ZiG). This week, the spotlight is on the potential challenges that could hinder the Reserve Bank of Zimbabwe (RBZ)’s goal of achieving local currency and price stability.

Polarised society

The success of public and economic policies hinges on a functional social contract between the government and its citizens. However, Zimbabwe's current political climate, marred by corruption, nepotism, partisanship, patronage, a weak opposition, disputed electoral results, and human rights violations, is tearing the nation apart.

This, coupled with an economic model that favours a select few, is pushing the majority, especially the youth, into a vicious cycle of extreme poverty, posing a significant challenge to the new local currency.

Despite the nation's wealth of valuable natural resources in global demand and the diligent tax contributions to the Zimbabwe Revenue Authority (Zimra) by many citizens, the government is grappling with the provision of quality, affordable, and inclusive critical public services, such as healthcare, housing, and education — a stark example of the ‘natural resource curse’.

As a result, national pride is waning, with many citizens feeling a lack of belonging and disrespect from their elected officials.

Despite the bleak situation, there is still hope for a turnaround. It is crucial to bridge the widening political gap by establishing an inclusive political dialogue platform that encourages diverse ideas and implements sustainable political and economic reforms. This is not just a suggestion but a necessity for the survival of the new local currency.

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Public perceptions

Due to the fiscal and monetary authorities’ track record of policy inconsistencies and distortionary interference in foreign exchange markets for a long time now, it will be difficult for the public to change their perceptions immediately.

Understanding these deeply ingrained public perceptions is crucial for addressing the challenges facing the new local currency. Many economic participants have incurred cumulative irrecoverable losses due to RBZ-led currency changes.

For instance, the bond notes were reportedly introduced in 2016 under a US$200 million external facility to guarantee their stability and convertibility.

Because of this facility, the bond notes traded at 1:1 against the United States dollar (USD). The fixed peg was later abandoned, but the public never got their USD back, sparking a pertinent question: Was there any ‘external USD facility’ in the first place?

Now that authorities are presenting the public again with the same failed concept of backing local currency, will they succeed? Without a bold reform agenda to guarantee increased transparency and accountability of RBZ reserve holdings and timely publication of key monetary aggregates, the ZiG risks facing the same fate as its predecessor.

Rapid dollarisation

Official statistics indicate that before the Zimbabwe local dollar (ZWL) was abandoned, the local unit supported payment of only about 20% of transactions in the formal markets.

Economic history shows that dollarization is nearly a permanent feature. Hence, de-dollarising an economy becomes a long, tumultuous process that, to succeed, would only require swift implementation of consistent market-led policies and reforms.

Since 2019, Zimbabwe has been struggling to de-dollarise its economy. For instance, the Treasury tried to introduce a mono-currency regime by promulgating Statutory Instrument 142 (SI142) in June 2019.

However, the SI142 mono-currency system was short-lived as authorities backtracked and were forced to re-introduce a multicurrency system (primarily USD), which was then extended to December 2030.

Almost all economic actors have enjoyed the stability and convenience of using hard currencies like the USD for an extended period. This, coupled with cumulative losses incurred by the public over the years due to local currency revaluations and continued volatility, will not likely make the public to be indifferent between keeping the ZiG and the USD.

Therefore, authorities are implored to institute policy measures that will, over time, make the ZiG more appealing and acceptable to the transacting public.

Rising informality

The ZiG was introduced at a time when the formal economy was shrinking. Approximately 70% of economic activities are estimated to be conducted in the informal economy. Various factors are making the informal sector more attractive relative to its formal counterpart, chief among them being the existence of a regressive tax system, high tax compliance costs, increased cost of capital, public debt distress, and failing socio-economic policies.

A thriving informal sector undermines the effectiveness of monetary and fiscal policies. The sector functions largely on a cash basis, thus enabling public corruption, facilitating illicit financial flows (IFFs), sustaining excessive rent-seeking behaviours (speculation and arbitrage), and promoting money laundering. As such, authorities must address rising informality if the ZiG is to be durably stabilised.

Climatic shocks

Zimbabwe’s agriculture sector is predominantly rainfall-dependent. Statistics show that roughly a paltry 6% of total arable land is under irrigation.

This explains the country’s increased vulnerability to unforeseen contingencies like El Niño-induced prolonged dry spells and droughts when compared to regional peers like Zambia and South Africa.

In the 2023/24 farming season, Zimbabwe experienced severe climatic shocks which greatly affected grazing pastures and crop yield at harvest.

Preliminary statistics project a 70% decline in maize production for human consumption to 696 116 metric tonnes when compared with the output in the 2022/23 season. This deficit will likely negatively impact maize availability, locally produced stock feed, and food prices.

Also, the need to fill the maize gap with imports will probably exert increased demand and preference for foreign currency (USD and rands) in settling market transactions.

Again, foreign humanitarian assistance in the outlook period will likely be limited as traditional donor countries are focused on war-torn regions like Gaza and Ukraine.

In addition, the climatic shocks experienced in the agriculture sector exert ripple effects on overall economic activity and government revenue mobilisation at a time when fiscal pressures are expected to remain elevated.

The latter would create money printing pressure, which is highly inflationary. So, if durable local currency stability is to be achieved, authorities should think long-term and consider expediting the greening of crucial sectors like agriculture, mining, and energy sectors.

Unsustainable debt

About 70% of Zimbabwe’s debt stock, which is more than US$17 billion, is officially reported to be owed externally. Of this 70% external debt stock, a staggering 52% are interest arrears, principal arrears, and penalties.

In other words, the nation is trapped in external debt distress – struggling to honour its contractual obligations with creditors. Debt unsustainability continues to increase Zimbabwe’s investment risk premium as foreign and domestic investors struggle to raise capital or repatriate their profits.

High indebtedness also constrains the countercyclical effects of fiscal policies and sustains heightened interest, tax, and inflation rates, which are counterproductive.

Because of existing bad debts, multilateral institutions like the African Development Bank (AfDB) and World Bank no longer extend concessional loan financing and support to Zimbabwe until all arrears are cleared.

This is a tall order for Zimbabwe, a nation facing a fiscal space that is too limited, and authorities are now utilising alternative yet expensive financing modalities like resource-backed loans (RBLs).

However, the RBL loans mainly accrue in secrecy and thus only cater to the interests of those being part of negotiations, undermining the rights of other groups like workers, wildlife, the environment, and future generations.

As such, devising clear policies and reforms to address the debt crisis quickly should form part of a long-term strategy to create conducive conditions for a stable currency.

Energy availability and cost

Zimbabwe is expected to experience prolonged power rationing schedules in the outlook period primarily due to perpetual and severe climatic shocks, which are causing unfavourable rainfall patterns across the region.

Below-average rainfall received in the 2023/24 rain season has affected Kariba Dam live water levels and thus will significantly impact hydroelectricity production.

Also, aging Hwange thermal power plants, now due for complete overhauls, will continue to break down frequently in 2024, exacerbating electricity loadshedding.

Again, there are foreign currency shortages in formal markets, which are crippling ZETDC’s ability to import complete maintenance components or augment constrained domestic production with adequate electrical energy imports.

In addition, reliance on a rigid pricing system in a volatile currency environment results in suboptimal ZiG electricity tariffs, which scales down output from independent power producers (IPPs) while scaring away other potential energy sector investors.

Electricity shortage is an albatross to local industrial activity and increases the cost of doing business, especially when prices of electricity substitutes like fuel remain highly elevated.

Apart from supply issues, expensive energy prices, particularly for fuel, threaten the stability of the ZiG. Fuel costs are reportedly relatively high in Zimbabwe compared to many regional countries, including landlocked peers like Zambia.

A granular analysis would identify various enabling factors, including, among others, inefficient fuel infrastructure, expensive ethanol, high government fuel tariffs and levies, rising global geopolitical tensions, and a lack of competition in the domestic fuel market.

All these add to business operational costs, subdue national output growth, and increase currency substitution.

Fragile local industry

As mentioned earlier, Zimbabwe must downsize its foreign expenditure bill (imports) to reduce demand for foreign currency and promote local industry.

However, due to over two decades of economic mismanagement, the cost of doing business in Zimbabwe has trended upward ever since, thus rendering local manufacturing firms uncompetitive compared to regional counterparts.

Therefore, authorities must undertake the ease of doing business reforms to lift the burden on local businesses and expand hiring and sustainable investment.

Global geopolitical tensions

The rising global geopolitical tensions primarily driven by the Russia-Ukraine war in Europe and the Israel-Hamas war in the Middle East pose a great risk to the stabilization of the ZiG.

These tensions exert significant spill-over effects, particularly on the global food, mineral, and crude oil prices.

Perennial net importers like Zimbabwe are disproportionately absorbing these spill-over effects, thus increasing import bills.

So, Zimbabwe will remain susceptible to frequent global fluctuations without a sustainable plan to substitute imports and boost local manufacturing. In other words, increased USD demand will likely remain RBZ’s nightmare in its quest to attain ZiG stability.