New ZiG currency is a short term gimmick lacking stamina for economic stability — top economist 

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Business Reporter

AN economic expert has criticised the newly launched Zimbabwe Gold (ZiG) currency as a measure lacking substance to turn around the economy on the back of a stern warning that once again, the country has committed to the same old path of failed economics.

The remarks come in the wake of the introduction of the ‘structured currency’ enshrined in the Reserve Bank of Zimbabwe (RBZ) Monetary Policy Statement (MPS) presented by the new governor, John Mushayavanhu on Friday.

ZiG is anchored by a composite basket of foreign currency and precious metals (mainly gold) held as reserves for this purpose by the apex bank.

With effect from 5 April 2024, the banking sector will convert the current Zimbabwe dollar balances into the new currency.

But top economist, Prosper Chitambara argued that the first major setback around the latest initiative is the confidence deficit.

“Confidence is about economic agents trusting or having faith in a currency as well as the institution managing the currency. Confidence is closely related to inflationary developments. High inflation erodes the value of any currency which causes economic agents to lose confidence in that currency resulting in currency substitution or dollarisation,” he said.

Chitambara said the chronic high inflation the country is reeling under, and has previously experienced, has resulted in a significant confidence deficit in the local currency as well as a massive loss of value driven by the unsustainable growth in money supply and the consequent depreciation of the local unit.

The top economist said reserves, on the other hand, support a country’s currency by providing liquidity, stabilising the exchange rate, and maintaining confidence in the economy while  providing  policy space to maintain price and financial stability in the face of large exchange rate volatilities.

“As of 5 April 2024, the RBZ has reserve assets of US$100 million in cash and 2,522 kgs of gold (US$185 million) to back the entire local currency component of reserve money which currently stands at ZW$2.6 trillion requiring full (100%) cover of gold and cash reserves amounting to US$90 million.

“The Southern African Development Community (SADC) convergence criterion specifies import cover comprising up to six months of imports.

“In 2023, total imports were US$8.5 billion implying average monthly imports of about US$710 million, which means that the country would require import cover of up US$4.3 billion to adequately anchor and sustain the ZiG. The total reserves of US$285 million may, therefore, be grossly inadequate to support the ZiG,” Chitambara said.

The seasoned economist noted that inorder to sustain the ZiG, the country must fully commit to fiscal and monetary discipline going forward, highlighting that such will help in reducing galloping inflation, thereby contributing to the restoration of confidence in the local currency by economic agents.

He said the country also needs to boost its foreign reserves in line with the SADC macroeconomic convergence target of up to six months of imports.

In line with observations by the International Monetary Fund (IMF) staff following completion of the Article IV Mission to Zimbabwe in February 2024, Chitambara said there is an urgent need to amend the RBZ Act to narrow its legal mandate to core functions and also to ensure that its more independent.

Among risks RBZ faces, Chitambara added, were political interference in decision making processes, and coercion of its officials to lend government as witnessed in the past.

An IMF study, looking at dozens of central banks from 2007 to 2021, shows that those with outright independence were more successful in keeping people’s inflation expectations in check, which helps keep inflation low.

Greater central bank independence is associated with lower inflation.

Despite assurances of brighter days ahead, Chitambara expressed scepticism that the economic shocks and experienced drought will make preservation of the MPS a mammoth task going forward as fiscal spending remains inevitable.

“Ultimately, the currency crisis the country has been experiencing is symptomatic of structural and institutional challenges deeply embedded in the country.

“Sustainably addressing these challenges requires a comprehensive and inclusive approach anchored on social dialogue,” he added.

Civic society organisation, ActionAid Zimbabwe also dismissed ZiG arguing it will not restore the confidence deficit, which the embattled African nation desperately needs.

“The introduction of the ZiG risks repeating the mistakes of the past. Instead of addressing the root causes of the country’s economic challenges, it offers a temporary fix that fails to inspire confidence among Zimbabweans.

“We believe that true economic recovery can only be achieved through comprehensive reforms that address corruption, mismanagement and lack of transparency,” the NGO said.

The organisation instead urged the government to come up with measures which create an environment that is conducive for investment, promoting accountability and good governance and prioritising the needs of ordinary Zimbabweans.