News / National
ZiG exchange premium skyrockets
13 Sep 2024 at 16:03hrs | Views
Leading research firms have raised alarm this week over the ballooning exchange premium for the Zimbabwe Gold (ZiG) currency, with parallels being drawn to the collapse of the Zimbabwe dollar. The rapid depreciation of the ZiG has sparked fears that Zimbabwe's local currency may face a similar fate.
Introduced in April, the ZiG has experienced a steady decline, with its official exchange rate falling from ZiG13.56 to ZiG13.95 per US dollar as of Tuesday. On the parallel market, however, the currency's value has plummeted, trading between ZiG16 and ZiG26 per US dollar.
Research firm Equity Axis highlighted these imbalances in its latest report, warning that the exchange rate disparities suggest the country's reserves may not be as robust as claimed. "The market imbalances observed in the parallel market suggest that reserves may not be at the purported levels," the report noted.
"Such disparities highlight a heavily regulated exchange rate market, which ultimately risks suffering a painful collapse. ZiG will fail without market confidence, a floating exchange rate, and adherence to economic principles such as supply and demand. Imprisoning dissenters will not foster the necessary confidence on its own," the firm cautioned.
Equity Axis warned that the widening exchange premium for the ZiG is reminiscent of the conditions leading up to the collapse of the Zimbabwe dollar. It called for the establishment of a transparent and independent system for verifying the country's gold reserves to bolster confidence in the currency.
In contrast, another research firm, Fincent Securities, offered a more cautious outlook, suggesting that the ZiG still has potential if adequately supported by government policies. "It is definitely not doom and gloom, but there are red flags that might pose challenges and undermine the ZiG, just like the Zimbabwean dollar," the firm said in its half-year report.
Fincent pointed to the ZiG's challenges, such as its lack of convertibility and failure to convince market participants to demand and use it. The widening gap between the official exchange rate and parallel market rates further undermines its credibility.
Equity Axis compared the ZiG's performance to that of the ill-fated Bond Notes, noting that both currencies have struggled to serve as a medium of exchange for essential services like fuel, rent, and passport fees. This has diminished demand for the local currency, while increasing reliance on the US dollar.
"The inability of the ZiG to serve as a medium of exchange for these essential services has widened the confidence deficit in the currency," Equity Axis said.
In response, the government has implemented harsh penalties, including imprisonment, against illegal foreign exchange traders. However, Equity Axis believes these crackdowns are insufficient to address the underlying issues. "Government crackdowns may be akin to merely putting a bandage on a more severe issue," the firm stated.
To stabilize the ZiG, Equity Axis recommended that the government build gold reserves, manage the money supply, and allow the exchange rate to float. It also urged authorities to start accepting the ZiG for critical payments, which could help foster trust in the currency.
The mid-term budget introduced several tax reforms, with taxes to be collected in ZiG unless otherwise specified. However, analysts have pointed out that the "unless" clause holds significant weight in determining the currency's future.
With the exchange premium nearing 77%, financial analyst Tinashe Duma has warned that Zimbabwe's economic stability is on shaky ground. Inflation is rising in both ZiG and US dollars due to the complex interplay between the two currencies.
In August 2024, month-on-month blended inflation increased to 0.4%, up from -0.1% in July. US dollar inflation stood at 0.2%, while ZiG inflation surged to 1.4%. This signals a marginal rise in the cost of goods and services, raising concerns over the country's economic health.
The widening gap between the official ZiG/US dollar exchange rate and parallel market rates is putting pressure on formal businesses that accept local currency payments. Many have responded by raising US dollar prices to cushion themselves against exchange rate losses imposed by authorities.
Equity Axis pointed to the expansion of the money supply in the third quarter as a key factor behind the currency's rapid devaluation in the parallel market, which has widened the exchange premium to over 70%.
In response, the central bank has introduced monetary policy measures aligned with the new currency, replacing the currency auction system with an interbank market. However, with inflation on the rise, concerns are mounting that the ZiG could face the same fate as the Zimbabwe dollar, which collapsed during the hyperinflation era of 2007-2008, leaving citizens devastated.
As Zimbabwe grapples with rising inflation and a volatile exchange rate, the future of the ZiG remains uncertain, with many fearing a return to the dark days of economic instability.
Introduced in April, the ZiG has experienced a steady decline, with its official exchange rate falling from ZiG13.56 to ZiG13.95 per US dollar as of Tuesday. On the parallel market, however, the currency's value has plummeted, trading between ZiG16 and ZiG26 per US dollar.
Research firm Equity Axis highlighted these imbalances in its latest report, warning that the exchange rate disparities suggest the country's reserves may not be as robust as claimed. "The market imbalances observed in the parallel market suggest that reserves may not be at the purported levels," the report noted.
"Such disparities highlight a heavily regulated exchange rate market, which ultimately risks suffering a painful collapse. ZiG will fail without market confidence, a floating exchange rate, and adherence to economic principles such as supply and demand. Imprisoning dissenters will not foster the necessary confidence on its own," the firm cautioned.
Equity Axis warned that the widening exchange premium for the ZiG is reminiscent of the conditions leading up to the collapse of the Zimbabwe dollar. It called for the establishment of a transparent and independent system for verifying the country's gold reserves to bolster confidence in the currency.
In contrast, another research firm, Fincent Securities, offered a more cautious outlook, suggesting that the ZiG still has potential if adequately supported by government policies. "It is definitely not doom and gloom, but there are red flags that might pose challenges and undermine the ZiG, just like the Zimbabwean dollar," the firm said in its half-year report.
Fincent pointed to the ZiG's challenges, such as its lack of convertibility and failure to convince market participants to demand and use it. The widening gap between the official exchange rate and parallel market rates further undermines its credibility.
Equity Axis compared the ZiG's performance to that of the ill-fated Bond Notes, noting that both currencies have struggled to serve as a medium of exchange for essential services like fuel, rent, and passport fees. This has diminished demand for the local currency, while increasing reliance on the US dollar.
"The inability of the ZiG to serve as a medium of exchange for these essential services has widened the confidence deficit in the currency," Equity Axis said.
To stabilize the ZiG, Equity Axis recommended that the government build gold reserves, manage the money supply, and allow the exchange rate to float. It also urged authorities to start accepting the ZiG for critical payments, which could help foster trust in the currency.
The mid-term budget introduced several tax reforms, with taxes to be collected in ZiG unless otherwise specified. However, analysts have pointed out that the "unless" clause holds significant weight in determining the currency's future.
With the exchange premium nearing 77%, financial analyst Tinashe Duma has warned that Zimbabwe's economic stability is on shaky ground. Inflation is rising in both ZiG and US dollars due to the complex interplay between the two currencies.
In August 2024, month-on-month blended inflation increased to 0.4%, up from -0.1% in July. US dollar inflation stood at 0.2%, while ZiG inflation surged to 1.4%. This signals a marginal rise in the cost of goods and services, raising concerns over the country's economic health.
The widening gap between the official ZiG/US dollar exchange rate and parallel market rates is putting pressure on formal businesses that accept local currency payments. Many have responded by raising US dollar prices to cushion themselves against exchange rate losses imposed by authorities.
Equity Axis pointed to the expansion of the money supply in the third quarter as a key factor behind the currency's rapid devaluation in the parallel market, which has widened the exchange premium to over 70%.
In response, the central bank has introduced monetary policy measures aligned with the new currency, replacing the currency auction system with an interbank market. However, with inflation on the rise, concerns are mounting that the ZiG could face the same fate as the Zimbabwe dollar, which collapsed during the hyperinflation era of 2007-2008, leaving citizens devastated.
As Zimbabwe grapples with rising inflation and a volatile exchange rate, the future of the ZiG remains uncertain, with many fearing a return to the dark days of economic instability.
Source - the independent
