EDITORIAL COMMENT: ZiG acceptance to spur market confidence, stability ZiG’s linkage to gold enhances its credibility and long-term viability

AS the ZiG continues to strengthen, gaining just over 2,2 percent against the US dollar since its launch two and half weeks ago, it has now been fully accepted by the formal Zimbabwean business community, including those who had tried to switch to pure US dollar transactions.

The important regional airline fastjet is now accepting payment for tickets in ZiG, meaning it is confident that it can pay its own bills in that currency or buy the necessary foreign currency for any imports.

That particular airline works to very tight profit margins, so there is no padding that would allow it to ever use the black market, so it is obviously confident.

There is also general public acceptance. Manufacturers and retailers report no panic buying, no shortages and generally just normal shopping, normal demand and normal supplies. The ZiG is now being given a fair chance to prove its worth.

A major factor in its acceptance is its stability. Although there has been marginal daily strengthening on each of the 11 trading days within the commercial banking system since the launch, even more important has been the minuscule extent of each daily change, usually somewhere around a quarter of a percent or less, the same sort of changes likely in most stable currencies.

Reserve Bank Governor Dr John Mushayavanhu sees the decision that half of the normal quarterly tax payments must be paid in ZiG as a contributing factor to the strengthening. Businesses need to hang on to more of their ZiGs to meet their tax bills. So everything is coming together.

The use of the US dollar had reached around 80 percent of all transactions, and that percentage is now falling, perhaps slowly at first, but as acceptance rises we can expect more businesses and more people to be using ZiGs.

Dr Mushayavanhu thought that once around half of transactions were in ZiGs, then the sharp distinctions between what currency was being used would largely disappear. It would basically depend on what the customer making the purchase had in which bank account.

The swings we grew accustomed to with the unbacked Zimbabwe dollar could and did trigger price rises based on what the honest thought could be the exchange rate in a couple of weeks and what the dishonest wanted to use to profiteer.

While the direction of the daily change is less important than the small scale of the daily change, the strengthening seen since the launch is certainly an additional bonus, showing that the fundamentals were in place. The interbank mid-exchange rate moved from ZiG13,5616 to the US dollar at launch to ZiG13,2536 yesterday. The strengthening also shows that the markets accept the scale of the foreign currency and gold reserves backing the currency.

Dr Mushayavanhu yesterday told a joint sitting of the Portfolio Committees on Budget, Finance, Economic Development and Investment Promotion and of Industry and Commerce that the Reserve Bank had reserves of US$100 million in cash and nostro balances and gold reserves worth US$185 million.

He also stressed that the official interbank exchange rate is not set by the Reserve Bank of Zimbabwe or the Government. It is generated as the weighted average of what each of the private sector commercial banks are prepared to pay when they buy foreign currency from willing sellers, and the rate each uses when they sell that foreign currency to a willing buyer.

This is a major reform and finally ends the interference in exchange rates by the authorities that has been in place since the local currency was delinked from sterling almost 60 years ago.

The acceptance of the currency, the willingness to use banks to fund imports and sell export proceeds, and the retreat from the back market has been helped by the action against black market dealers.

Police operations against black market dealers saw 65 arrested last weekend in sting operations, and there were the actions of the Financial Intelligence Unit in uncovering businesses that were not accepting ZiGs and then freezing their accounts.

While the police operations against street dealers will help, largely by making it a lot more expensive to deal in the black market, there is a need to go beyond these petty dealers or agents of the major dealers, and tackle those who largely manage and manipulate the black market and accumulate the larger sums that some businesses used to buy when they went to the black market.

While some street dealers are independent, buying and selling tiny amounts, others are connected to a quite different breed who deal with a pack of street dealers, and there were even higher levels of those who dealt with a group of these initial accumulators. The market was always messy.

While rounding up the foot soldiers is useful, it will be fairly easy to replace those who are forced to withdraw. So a determined effort to track down and bring to court the kingpins in the black market will be a major blow against illegal dealing. These are the people who have the capital to fund the dealing at a major level, and will be hard to replace.

We assume that the courts would be interested in significant jail sentences for breaches of the Exchange Control Act that involve larger sums, so getting a handle on this group is important. Perhaps it can be explained to the smaller fry that becoming accomplice witnesses can earn them freedom.

But pressure on the black market dealers will also make their dealing less profitable and as they increase margins between what they pay for foreign currency and what they sell that currency for to cope with higher costs, such as fines, confiscations and lawyer bills, the market will become ever less attractive as customers at each end feel ever more cheated.

The use and acceptance of the ZiG relies on a swathe of factors, but the authorities now seem to have touched each point and so just as ill effects can snowball, so can the positive factors.

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