ZiG moving to become main currency

Source: ZiG moving to become main currency – herald

THE ZiG is moving steadily towards becoming the main commercial currency in Zimbabwe as more businesses and people trust the currency and the solid backing it has through growth of gold and foreign currency reserves.

More importantly, the solid fiscal and monetary discipline of the authorities has improved confidence in the ZiG.

At present rates of increased use, it will become the main currency within a couple of months, creating a milestone in Zimbabwe’s progress to becoming a country where all local transactions are in local currency.

When the ZiG was introduced in April last year, just 26 percent of transactions in the formal economy were denominated in the local currency.

By the end of May this year, 43 percent of transactions by value processed through the Zimbabwe National Payments System were using ZiG, and with economic growth this has seen ZiG use rise from ZiG7,86 billion in April last year to ZiG56,8 billion last month.

The Reserve Bank of Zimbabwe has also seen more businesses and individuals retaining ZiG holdings in their bank accounts for longer on average, rather than seeing how fast they could spend the local currency.

That rapid turnover in local currency had arisen as a practical response to falls in value in the old Zimbabwe dollar and high resulting inflation.

So everybody tried to convert their local currency to foreign currency or buy goods and services as quickly as possible. There is growing trust in ZiG, not just for transactions as might be expected, but very importantly, more use of the currency for normal business purposes, which includes keeping cash in the bank until it is needed for purchases or investment or, for that matter, paying taxes in the next month or the next quarter.

A number of careful policies and measures by the Government and the Reserve Bank, pushing in the same direction although the two authorities are independent of each other, has contributed to the arrival of a respectable local currency earning ever higher degrees of trust where it counts, in the business world and the market place.

The tight fiscal discipline of Government, that is with all recurrent and most capital spending coming out of taxes and zero creation of money, has ensured that the Government has not been a source of money supply creation since the advent of the Second Republic.

There is a small percent of borrowing on the capital account, but only for things that produce an immediate flow of direct income that can service and retire the debt.

The two authorities hunted down all the taps that were just creating new money without backing and some of these were far from obvious even for economists and accountants.

All these unguarded taps were turned off. That in itself was a return to what should be normal conditions, since several of these taps were the creation of quasi-fiscal operations by the Reserve Bank.

A second major contribution to the stability of the new currency was the decision by the Government to assign half the mineral royalties to the Reserve Bank to build up reserves in kind to back the currency and the general economy.

For practical reasons, the reserves have been built up in gold, with the reserve portion of the royalties from producers of other minerals converted to gold.

That has seen the gold reserves in the vaults of the Reserve Bank rise from 1,5 tonnes at the launch of the ZiG to 3,4 tonnes last week, when President Mnangagwa went to inspect the bars, as he had done at the beginning.

These inspections, and the accompanying photographs, overcome conspiracy theories that there is little or no gold by showing the actual bars.

The Reserve Bank now sees the reserves rising to around 5 tonnes by the end of the year, well over three times what they were when the ZiG was launched.

While all modern currencies are fiat currencies, that is based on a decree by a Government or central bank, the ZiG is effectively unique in the world in that it is backed by large gold reserves.

A pile of 3,4 tonnes of gold is worth around US$370 million or close on ZiG10 billion.

The Reserve Bank has the major role in managing liquidity in the market. This requires that liquidity increases only as fast as the economy grows and transactions increase.

Too much liquidity and you get inflation: too little you get deflation and economic contraction. There is an ideal amount that allows economic growth with minimal inflation and this is what the Reserve Bank aims to ensure.

The business world is generally happy that the Reserve Bank has managed that interesting feat of having adequate liquidity with a stable currency that is growing in use.

This is not a simple process, especially with the switch to market forces for most purposes and is a sign that the Reserve Bank, now concentrating purely on monetary policy for the first time since the middle 1960s, is able to get things right.

One major switch in buying and selling in recent years has been the growing almost total dominance in electronic transactions rather than people carrying bundles of cash.

Even in foreign currency transactions there has been more use of digital money and in ZiG transactions banknotes have become very rare.

There are still small transactions where banknotes can be useful, such as bus fares or buying vegetables at a market stall, and the Reserve Bank is in the process of introducing a range of ZiG notes, although the highest value will be just ZiG200, worth a little over US$6 at the general retail rate of exchange.

This keeps banknotes as small change, useful for buying a hamburger or a bus ticket, but not for important shopping, let alone business transactions.

In time physical cash, like banknotes, are likely to die out across the world, with everyone using digital money from their phone or some similar sort of device. But there are still a lot of old-fashioned people who still want something in their wallet besides a card, and enough business people who want to avoid taxes, to keep some use for banknote transactions.

But no one should confuse availability or use of banknotes with transactions and liquidity.

The banknotes are simply a convenience, just like a card or a phone, to making some payments in some circumstances.