News / National
'ZiG defence plan doomed'
05 Oct 2024 at 16:35hrs | Views
The introduction of Zimbabwe's gold-backed currency, Zimbabwe Gold (ZiG), has faced a series of severe setbacks, pushing the economy deeper into turmoil, according to a new report by the Confederation of Zimbabwe Industries (CZI). The Reserve Bank of Zimbabwe (RBZ) initially hoped to stabilize the economy with ZiG, but missteps in its defence strategy have led to significant challenges.
Authorities rushed to introduce ZiG in April, aiming to stem the currency's decline following the collapse of bond notes, which lost over 75% of their value during a first quarter marked by high inflation. Bond notes had been in circulation for nearly a decade before this rapid decline.
RBZ Governor John Mushayavanhu admitted to the Zimbabwe Independent that the central bank is now scrambling to find new ways to boost demand for the struggling currency. One of the key strategies was to require companies to pay 50% of their corporate taxes in ZiG, with the rest paid in foreign currency. The aim was to create more demand for the local currency, stabilizing its value in the market.
However, this plan has hit major hurdles. Over the past few weeks, market volatility and currency rejection across several sectors forced the central bank to devalue ZiG by 43%. The CZI, in a detailed 12-page report titled Inflation and Currency Developments Update, had already raised concerns about this approach, warning that corporate tax was not a reliable driver for boosting currency demand.
"Corporate tax is currently the worst-performing tax head in terms of overall contribution," the CZI report stated. "Thus, selecting such a tax head as the basis for demand for ZiG is bound to have very little traction. A better option would have been Pay As You Earn (PAYE) taxes, which are more robust and can generate the necessary demand for local currency."
The report also highlighted that the local business environment is challenging, with many companies operating at a loss, making it difficult for corporate taxes to stimulate demand for ZiG. Zimra, the country's tax authority, confirmed this trend, noting that corporate tax collections missed targets by 14% in the first half of 2024 due to competition from Zimbabwe's informal economy, which controls 72% of the market.
Mushanawani acknowledged the struggles but maintained that the government's move to make ZiG mandatory for some tax payments was critical to creating a foundation for the currency. Yet, he also noted that there are ongoing discussions with the Ministry of Finance to explore additional strategies to strengthen demand for ZiG.
The challenges facing ZiG have been amplified by its rejection across the country. Fuel stations, retailers, schools, and even public institutions have refused to accept the currency, pushing it further into crisis. On the black market, where ZiG has been battling a brutal depreciation, it traded at premiums of up to 100%, leading to rampant price distortions.
Since its introduction, the currency has lost considerable value, falling from US$1.56 to US$1.95 on the formal market, while on the black market, it plummeted to US$1.
CZI's report indicated that the central bank's failure to address the widening gap between the official and parallel market exchange rates has exacerbated the situation. The black market premium widened by 17% between July and August, further destabilizing the economy.
Economists have warned that Zimbabwe could be heading toward another catastrophic period of hyperinflation similar to 2008, when inflation soared to 500 billion percent, forcing the country to abandon its currency and adopt the US dollar.
"The widening parallel market premium is one of the critical variables the RBZ should focus on," CZI said. "Currently, the market has rejected the official exchange rate, and the parallel market rate is now used in service and product pricing."
In response, Mushayavanhu acknowledged the gravity of the situation, stating that some markets had avoided using the local currency, undermining its stability. He reiterated the RBZ's commitment to creating demand for ZiG, primarily through the mandatory 50% corporate tax payments in local currency, but also hinted at further measures to stabilize the economy.
Despite these efforts, the outlook for ZiG remains uncertain, with the economy's growth forecasts slashed multiple times this year. GDP growth for 2024 was initially projected at 5.3% but was revised to 2% in the central bank's latest monetary policy statement.
With inflationary pressures mounting, the success of Zimbabwe's gold-backed currency and its ability to stabilize the economy depend on the central bank's ability to effectively manage the parallel market and instill confidence in the local currency.
Authorities rushed to introduce ZiG in April, aiming to stem the currency's decline following the collapse of bond notes, which lost over 75% of their value during a first quarter marked by high inflation. Bond notes had been in circulation for nearly a decade before this rapid decline.
RBZ Governor John Mushayavanhu admitted to the Zimbabwe Independent that the central bank is now scrambling to find new ways to boost demand for the struggling currency. One of the key strategies was to require companies to pay 50% of their corporate taxes in ZiG, with the rest paid in foreign currency. The aim was to create more demand for the local currency, stabilizing its value in the market.
However, this plan has hit major hurdles. Over the past few weeks, market volatility and currency rejection across several sectors forced the central bank to devalue ZiG by 43%. The CZI, in a detailed 12-page report titled Inflation and Currency Developments Update, had already raised concerns about this approach, warning that corporate tax was not a reliable driver for boosting currency demand.
"Corporate tax is currently the worst-performing tax head in terms of overall contribution," the CZI report stated. "Thus, selecting such a tax head as the basis for demand for ZiG is bound to have very little traction. A better option would have been Pay As You Earn (PAYE) taxes, which are more robust and can generate the necessary demand for local currency."
The report also highlighted that the local business environment is challenging, with many companies operating at a loss, making it difficult for corporate taxes to stimulate demand for ZiG. Zimra, the country's tax authority, confirmed this trend, noting that corporate tax collections missed targets by 14% in the first half of 2024 due to competition from Zimbabwe's informal economy, which controls 72% of the market.
Mushanawani acknowledged the struggles but maintained that the government's move to make ZiG mandatory for some tax payments was critical to creating a foundation for the currency. Yet, he also noted that there are ongoing discussions with the Ministry of Finance to explore additional strategies to strengthen demand for ZiG.
The challenges facing ZiG have been amplified by its rejection across the country. Fuel stations, retailers, schools, and even public institutions have refused to accept the currency, pushing it further into crisis. On the black market, where ZiG has been battling a brutal depreciation, it traded at premiums of up to 100%, leading to rampant price distortions.
Since its introduction, the currency has lost considerable value, falling from US$1.56 to US$1.95 on the formal market, while on the black market, it plummeted to US$1.
CZI's report indicated that the central bank's failure to address the widening gap between the official and parallel market exchange rates has exacerbated the situation. The black market premium widened by 17% between July and August, further destabilizing the economy.
Economists have warned that Zimbabwe could be heading toward another catastrophic period of hyperinflation similar to 2008, when inflation soared to 500 billion percent, forcing the country to abandon its currency and adopt the US dollar.
"The widening parallel market premium is one of the critical variables the RBZ should focus on," CZI said. "Currently, the market has rejected the official exchange rate, and the parallel market rate is now used in service and product pricing."
In response, Mushayavanhu acknowledged the gravity of the situation, stating that some markets had avoided using the local currency, undermining its stability. He reiterated the RBZ's commitment to creating demand for ZiG, primarily through the mandatory 50% corporate tax payments in local currency, but also hinted at further measures to stabilize the economy.
Despite these efforts, the outlook for ZiG remains uncertain, with the economy's growth forecasts slashed multiple times this year. GDP growth for 2024 was initially projected at 5.3% but was revised to 2% in the central bank's latest monetary policy statement.
With inflationary pressures mounting, the success of Zimbabwe's gold-backed currency and its ability to stabilize the economy depend on the central bank's ability to effectively manage the parallel market and instill confidence in the local currency.
Source - the independent
