(Bloomberg) -- Zimbabwe’s latest attempt to introduce a new currency is coming undone, just five months after initially being praised for taming an inflation spiral and exchange-rate volatility.
Central bank Governor John Mushayavanhu is being left to deal with the fallout in a nation which has faced multiple currency crises before. It is the veteran banker’s first reckoning of the market upheaval that was all too familiar among his predecessors.
Since Aug. 28 the ZiG, short for Zimbabwe Gold, has consistently lost value against the US dollar. It sells for 28 per dollar on the parallel market, a 50% discount to the official rate, stoking price distortions in the economy.
The governor is having to deal with the reality that without fixing the underlying factors plaguing the ZiG, there’s limited hope for the new currency, said Lyle Begbie, an economist at Oxford Economics.
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They include current account and fiscal pressures that have worsened due to an increase in food imports because of an El Niño-induced drought, plus lower commodity prices, which have led to reduced dollar inflows into the mineral-rich nation, which lacks access to international capital markets.
“Without sufficient foreign reserves, export growth, or sustained capital inflow the creation of a new currency does not simply magic up stability,” said Hasnain Malik, emerging market equity strategist at Tellimer in Dubai. “The most recent bout of pressure should not be a surprise.”
‘Sources of Arbitrage’
The currency is also being undermined by the tough operating environment that’s led to a thriving informal economy, estimated to be the world’s second largest after Bolivia, according to the World Bank.
Firms that bill in ZiG risk becoming “sources of arbitrage” for informal traders, who buy products in local currency and sell them for dollars, said Sekai Kuvarika, the chief executive officer of the Confederation of Zimbabwe Industries, the nation’s largest manufacturing association.
There’s also a shortage of dollars “because no one besides government is willing to sell their foreign currency,” Kuvarika said Wednesday in an emailed response to questions. A situation that isn’t being helped by the nation’s Treasury, she says.
“Treasury has let down the central bank by also showing huge demand for dollars and requiring only one poor performing tax head, corporate tax to be paid 50% in ZiG when there are very few firms making profit in this difficult environment,” Kuvarika said. Pay-as-you-earn could have been a more suitable target as “this would have seen every agent, including non-governmental organizations having demand for ZiG.”
Temporary Shock
Still, Mushayavanhu is hopeful the latest currency turmoil will be short-lived.
In recent post on X the central bank called it a “temporary shock.” The comment was followed by an opinion piece published in state media on Sept. 22, in which the governor blamed the currency issues on “supply and demand mismatches caused by timing differences in the realization of foreign-exchange inflows and outflows.”
He also said the central bank, which has injected $64 million so far this month into the foreign exchange market, is considering other measures to support the local unit. They include a tight monetary policy and using the country’s reserves if there are severe market disruptions that threaten economic stability. The central bank is set to announce its latest rate decision later this week.
The Bankers Association of Zimbabwe is also working with the central bank to improve the situation. Lenders’ plan to be “more consistent in supplying the interbank market with enough forex to meet bona-fide invoices going forward,” the lobby’s President Lawrence Nyazema said.
The $64 million released by the central bank has covered most transactions that were in the pipeline, Nyazema said. “This should ensure the provision of goods and services in ZiG at reasonable prices hence improving confidence in the currency.”
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(Updates with CEO of industry body’s comments from paragraph seven.)
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