Reserve Bank of Zimbabwe Governor John Mushayabanhu issued a monetary policy statement in which he announced the creation of ZiG (Zimbabwe Gold) by the central bank. (Jekesai Nikizana/AFP)
- Earlier this month, Zimbabwe introduced a new currency, ZiG, which stands for Zimbabwe Gold.
- The move is an effort to stabilize volatile exchange rates that have disrupted the country's retail industry.
- While businesses are rushing to adapt to ZiG, one of the biggest concerns is whether ZiG will create a parallel currency market, which could threaten exchange rate stability.
- For more financial news, visit: News24 Business Top Page.
From the small space Brian Tinotenda rents in the central business district of Bulawayo, Zimbabwe's second-largest city, he can look across the street to the supermarket where he once worked.
Tinotenda, along with about 24 other informal traders, pays about $200 (R3,800) a month for a small space where they sell toiletries and groceries such as rice, cooking oil and cornmeal. is the same one that was sold at Spar Group before we started. There are many differences between his new job and his previous job, but one of the big differences is that all of his items are now priced in US dollars.
The Zimbabwean government wants to change this. Earlier this month, it introduced a new currency, ZiG, which stands for Zimbabwe Gold. ZiGs are backed by 2.5 tonnes of gold and approximately $100 million in foreign exchange reserves held by the central bank, with each ZiG being worth approximately US$7, equivalent to the price of one milligram of gold.
The move is an effort to stabilize volatile exchange rates that have disrupted the country's retail industry and given informal traders like Tinotenda an advantage. For more than a decade, Zimbabwe has been suffering from a currency crisis caused by the government's decision to continue printing money. This fueled hyperinflation, reaching an official inflation rate of 500 billion percent in 2008. To settle the situation, the country switched back to the Zimbabwean dollar in 2019, after using the dollar for more than a decade.
Read | Zimbabwe's new currency ZiG begins trading amid big doubts
The problem is that businesses are forced to use the Zimbabwean dollar at the official exchange rate set by the central bank (which is widely seen as overvalued), while traders are forced to use the more stable American dollar. It's about being persistent. This means that retailers are obligated to sell products at significantly higher prices in US dollar terms than the same products sold on the street.
This policy has been a boon for informal traders, as 80% of all business transactions are conducted in US dollars. It is also a major liability for major retailers such as Johannesburg Stock Exchange-listed Pick & Pay Stores Ltd. and rival OK Zimbabwe Ltd., which has been operating in the country for 82 years. ing. Foreign exchange losses are eating away at the value of earnings as inflation rates soar (reaching 55% in March) and local currencies tend to fluctuate wildly.
Zimbabwe Retailers Federation chairman Denford Mutashu said the exchange rate restrictions had created a “huge disadvantage” for “compliant businesses that grapple with taxes, licenses, labor costs, rental costs, etc.” The IMF warned that these “promote informality, erode the tax base and undermine long-term growth.”
Retailers are even more frank. OK Zimbabwe, which earns just 20% of its revenue in US dollars, said the policy was putting businesses at risk of “forced death”.
Tony Hawkins, a Harare-based economist and former professor of economics at the University of Zimbabwe, said the ZiG was a “effectively revalued” Zimbabwean dollar. To support the new currency and boost growth held back by high borrowing costs, the central bank reset interest rates to 20% from a world record 130%. And so far, ZiG is off to a promising start, with him up 1.5% against the US dollar after more than a week of trading.
This is a big difference from what the Zimbabwean dollar will replace. When the dollar was sentenced to death on April 5, it was one of the world's worst-performing currencies, second only to the Lebanese pound. It has fallen in value every trading day this year.
Another factor that authorities are counting on for ZiG's success is that companies will no longer be forced to stick to a fixed exchange rate. Reserve Bank of Zimbabwe Governor John Mushayabanhu said assuming the currency stabilized, retailers were now at risk of being “forced out of the market” if they raised prices too much.
While businesses are rushing to adapt to ZiG, one of the biggest concerns is whether ZiG will create a parallel currency market, which could threaten exchange rate stability. For example, if the value of ZiG increases or decreases in the informal sector, it may affect the prices of goods and services, which may be reflected in the official exchange rate. According to Harare-based brokerage firm IHS Securities Ltd., it is only a matter of time before this happens.
“As a significant portion of the population remains unbanked, some form of parallel market is likely to emerge,” the company said in an April 8 note to clients. “It remains to be seen at what level the parallel rate will settle.”
ZimPriceCheck.Com, a website that tracks official and parallel exchange rates, was quoting a market price of 16 ZiG per dollar on Tuesday.
According to Zimbabwe's National Bureau of Statistics, the majority of Zimbabwe's 6.3 million workers are informally employed. Wholesale and retail trading of goods such as soft drinks, perfumes, and even diapers is common, and many traders work in “tuck shops,” which are “small spaces in crowded buildings.” Those who want to avoid overhead costs can also sell in the trunk of their car or on the side of the road.
The Reserve Bank of Zimbabwe estimates that the informal sector generates $14 billion in revenue annually. The World Bank calls Zimbabwe's underground economy (which operates strictly on a cash basis) the second largest in the world after Bolivia. Instant markets and vendors are so popular that some major retailers have linked them to a decline in foot traffic.
In Bulawayo's downtown central business district, informal traders sit along rows of sky-blue makeshift tents, hawking bales of second-hand clothes and electronics. The bales, known as “mavelo”, come from neighboring countries such as Mozambique and Zambia, where traders buy the goods in US dollars and take them back to Zimbabwe. Clothes are laid out in piles on the ground for pedestrians to stop and take a peek inside.
These Mavelo retailers are eating into the profits of major clothing competitors such as Edgars Stores Zimbabwe and Trueworth Limited Zimbabwe. In its March earnings release, Trueworth said its sales were down due to “cheap counterfeit imports sold below the cost of domestic and foreign manufacturing,” adding that it was “trying to remain competitive.” I can't do that,” he added.
These cross-border imports are not limited to clothing, with some sellers selling contraband Starlink devices on social media. These SpaceX kits are not yet legal in Zimbabwe, but they sell for between $1,000 and $1,250.
As retailers continue to lose out to unofficial sellers, many are hoping that ZiG will be the savior. OK Zimbabwe CEO Maksen Kalombo said he was optimistic about this as it was not locked into a fixed exchange rate. “This should bode well for the retail industry as a whole, as we now compete on value,” Kalombo wrote in response to questions.
Zimbabwe National Chamber of Commerce and Industry president Mike Kamungerem said the plan was to “give ZiG a chance” and review the effectiveness and impact of the new currency by June.
Still, as Imara Asset Management, the country's largest independent brokerage firm, said in a recent quarterly report, a break with the US dollar will be difficult. As the informal market grows, some major manufacturers now prefer to operate in it.
Among the companies that span both sectors are Zimbabwe's two largest bread manufacturers, who supply bread to tuck shops and roadside traders every morning. Tinotenda said the wholesale price of a loaf of bread is $80, but most informal vendors sell it for $1.
“But when you go to the supermarket, the same bread is sold for $1.20,” he said. “No one will buy it.”