Eddie Cross's Website

The Role of the ZIG

When the ZIG was launched in April this year, just 4 months ago, the Governor of the Reserve Bank stated that he had 3 times cover for the currency in hard currency and gold reserves. He said he was determined to protect its value and was confident he could do so. They held the value at about 15 to 1 for two months but in the past month, the parallel market rate has devalued to 22 to 1. It bounces up and down but the trend is down. If this continues the ZIG is wounded and will not recover.

Why is this important? Firstly, the case for our own currency and demonetising the hard currencies currently in free use in Zimbabwe - the USD, UK Pound, Pula, Rand, Yuan and the Yen. Our own experience starts this process. When we adopted the multicurrency system in February 2009, it was in the context of the total collapse of our own currency, the Zimbabwe dollar, after it had served us well since we abandoned the Pound and left the Sterling Zone. We really had no choice but to go this route and it was Chinamasa who bit the bullet.

The result was dramatic. Billions worth of different currencies poured onto the street, inflation went from world record levels to minus 7 per cent, shops went from empty to being fully stocked with everything we could want. Filling stations which had been dry for years, had full stocks at lower prices. Zimbabwe celebrated. Over the next 4 years, the revenue to Government rose from US$280 million in 2008 to US$4,3 billion in 2013, prices remained stable and we could buy virtually anything we needed on local markets. BUT our own productive economy in agriculture and industry, did not recover. At the start we were importing 90 per cent of what we needed, in 2013 we were still importing 70 per cent of what we needed.

The reason for the collapse of our own dollar in 2008 was quite simple; we had printed the local currency recklessly to cover a huge fiscal deficit and in an attempt to halt the collapse of our economy. We never asked how the Rhodesian regime had maintained their currency at 1 to 2 against the USD despite global sanctions and war before Independence in 1980. It was not magic, just plain old good governance and conservative fiscal policies.

What we all missed from that period was the fact that the local economy did not recover, we did not create jobs and instead we became the supermarket for the region and the world. Cross border smuggling grew massively - where people had previously shopped in neighbouring countries, they now used a runner who could deliver their needs in 48 hours with no VAT or other border charges. The informal sector which had always been a significant player in our economy boomed and the formal sector stagnated. But for the majority of our citizens, it was a Party.

When Mthuli Ncube took over the Ministry of Finance in 2018, he quickly identified a number of problems. Central to this was an unmanageable fiscal deficit and the existence of tens of billions of US dollars that had been printed by the Reserve Bank and now resided in our bank accounts. He created a new currency which he called, rather cleverly, the RTGS Dollar after the banking system that had created it. He separated the two and made them compete in the market. The local dollar crashed and burned, but for three years we saw a remarkable upsurge in local production. We nearly reached self-sufficiency in farm products, local industry expanded, and we were creating thousands of jobs every month. Imports fell below 40 per cent of consumption.

The reason? We had our own currency, which was working, albeit in a rather shambolic way. We started the auction of foreign currency and over 80 per cent of the sales went into raw materials and equipment - expanding local productive sectors. All this progress collapsed when the Reserve Bank failed to manage the auction properly and the market for the local currency disappeared. By 2023 we were back at square 1 and the use of the RTGS dollar was virtually abandoned.

Then the ZIG arrived. We had been there before and the dominating sentiment was 'here we go again'. Today the RBZ strives to force everyone to trade the local ZIG at 14.5 to 1 against the USD. 500 businesses have been fined or worse for violations. The informal sector, which is now half the economy, walks into stores, buys what they want at 14.5 to 1, walks out the door and sells it for USD in a market awash with USD cash, sells the USD for 22 to 1 and return to restock. The retailer sits with millions of ZIG in his accounts which no one will accept because they need hard currency to service their own demands. Our formal sector is crashing, job creation has been turned into job destruction, tax revenues are declining.

Recently in a walk about with top Government advisors, we saw basic foods produced here, being sold below cost in the informal market where the streets were crowded with buyers and vehicles. The same products were being sold in our top supermarkets at nearly double the price. Everybody is happy except the unemployed majority and the companies who actually produce something and the formal sector stores.

It cannot go on. If we allow this situation to continue, the ZIG is dead, like all its predecessors and no one will mourn its passing. Our top business newspaper carried the headline on its front page, 'We cannot permit the de-dollarisation process to be too radical'. This voice came from the consumers of hard currency cash that currently dominates the markets. The minority who try to produce anything here for sale, are either silent, or have no voice. When they argue for swift demonetarisation of the USD and other currencies, they are laughed at.

We need our own currency. The number of countries that allow what we have here, the so called multi-currency system, you can count on one hand and they all want to go back to their own currency. The reasons are simple, without your own currency, you cannot compete in this globalised world. Why has the third largest economy in the world devalued their currency, the Yen, by over 40 per cent this past year? It is so that Japanese manufacturers can remain competitive. The Chinese undervalue their currency and keep it that way by buying USD off the market when the Yuan strengthens. In the process building up reserves that allow them to borrow money at the lowest cost of any major economy.

All our neighbours have done the same thing. All foreign currency inflows are automatically converted to their local currency on arrival and a functioning interbank market ensures that the real market value of the local currency is maintained and conversion back available on demand to meet the needs for imports. They all have stable currencies and you cannot use the USD in the domestic markets. If we did that, our currency would be the strongest in the region and we would have to follow the example of China and start buying in USD and other major currencies for our reserves so as to help our own industries compete.

Such a move, supported by our sound fiscal and monetary policies and the huge surplus of hard currencies in our market, would quickly start to bring our informal sector into line, curb illegal imports and price manipulation by dealers who produce nothing and employ nobody, but make substantial profits from simply trading currency.

It is that simple.

Eddie Cross
Harare 18th August 2024