‘Allow all transactions to be settled in ZIG’
MARKET experts said this week the survival of the newly introduced Zimbabwe Gold (ZIG) currency hinged on authorities allowing all transactions to be settled in both the local unit and greenback.
Reserve Bank of Zimbabwe governor John Mushayavanhu introduced ZIG last week, replacing the battered Zimbabwe dollar.
But market analysts said the survival of the new currency was dependent on a number of measures, including allowing citizens to access foreign currency unencumbered at the willing-buyer willing-seller (WBWS) rate.
“The move to a transparent price discovery system is most welcome, but we opine that confidence in the system will be bolstered if there are provisions that allow all (fuel, for example) transactions to be facilitated by both the ZIG and USD, and citizens to access foreign currency unencumbered at the WBWS rate,” Morgan&co said in its market intelligence report.
“We also add that a key indicator of the success of these currency stabilising measures will be the integration of ZIG within the global currency market.”
The researchers said discontinuation of quasi-fiscal activities will be positive for the local currency vis-a-viz the crippling impact of fiscal indiscipline on the Zimbabwe dollar.
“We opine that this will significantly aid in slowing the depreciation of the ZIG. However, it will not stop the depreciation of the new currency because of current macro-economic challenges centred on El Niño and depressed metals prices that will continue to put pressure on the exchange rates,” Morgan&co said.
“Such currency depreciation has been observed in various SSA (sub-saharan Africa) economies and we do not expect Zimbabwe to be any different in 2024.”
Morgan&co said the new governor’s commitment to end quasi-fiscal activities and foster stability will be tested in the coming months by the movements in the exchange rate.
“We note that the new policy fails to provide measures to protect ZIG holders against the volatility of the price of gold. The gold price notched a record high of US$2 354 per oz (ounce) amid escalating geopolitical tension and anticipated rate cuts by the Fed (US Federal Reserve),” the research firm said.
“However, any de-escalation of geopolitical tension as well as delays in cutting rates could send the price of gold downwards with a ripple effect on ZIG and its ability to preserve value.”
It said this raised questions like “Will the RBZ (Reserve Bank of Zimbabwe) beef up its minerals and FX (foreign exchange) reserves to maintain the value of ZIG in circulation, and how?”
“We acknowledge the positive implications of the 100% FX retention to artisanal gold miners but the conflicts with the thrust to become an extensively Zig-driven economy by 2030 and raises concerns over the sustainability of such a move.”
FBC Securities noted that the introduction of the new currency provides an opportunity to reform and modernise the financial system, potentially increasing transparency and limiting the downside risks, which have been prevalent during the last few years.
“The transition to ZIG requires adjustments in banking systems, including updating software and processes,” FBC said.
“These exercises introduce operational risks which need to be closely monitored.
“Public perception and uncertainties around Zig’s stability may affect adoption, use and investment spending. Consistency in policy application by the government and RBZ will be key to building confidence.”
It applauded the measure to allow 50% of tax obligations to be paid in ZIG on quarterly payment dates.
“(The) measure will deflate inflationary pressures and increase demand for the local currency. The demand for local currency to pay taxes could impact the exchange rate, especially if a significant portion of tax payments are made in local currency. This can lead to limited exchange rate volatility,” FBC noted.
“Companies that earn revenue in foreign currencies, however, may face increased currency exchange risk when converting their earnings for tax obligations and fluctuations, therefore, will likely increase their taxation burden.”
For businesses operating in multiple currencies, the financial firm said managing tax payments in local currency added an administrative burden increasing compliance risk.
It said companies may need to deal with additional currency conversion processes and attendant administration issues.
“Requiring a significant portion of tax payments in local currency may impact government foreign currency revenues,” FBC said. “Moreso, fluctuations in exchange rates can influence the actual value of tax revenues collected in the local currency.”
Companies may also face challenges in financial reporting and compliance when they have to reconcile tax payments made in different currencies.