ZiG poised to strengthen further

Source: ZiG poised to strengthen further | The Sunday Mail

ZiG poised to strengthen further
Dr Mushayavanhu

Debra Matabvu

THE Zimbabwe Gold (ZiG) is poised to strength further against major currencies on the official market owing to an anticipated surge in demand for the local currency as companies race to meet their quarterly corporate income tax obligations.

Zimbabwean law mandates companies to pay taxes every quarter, with these deadlines known as quarterly payment dates (QPDs), which fall on March 25, June 25, September 25 and December 20 of each year.

A recent Government directive requires companies to pay half their tax obligations in ZiG and the remainder in United States dollars.

According to the Reserve Bank of Zimbabwe (RBZ), the Zimbabwe Revenue Authority typically collects approximately US$300 million worth of corporate income tax each quarter.

This translates to a projected demand for ZiG that is equivalent to US$150 million, about ZiG2 billion.

Presently, there is only around US$80 million (nearly ZiG1 billion) worth of ZiG circulating in the official market following the currency conversion in April, when ZiG replaced the Zimbabwe dollar.

This mismatch in the amount of ZiG available in the market and the anticipated amount required by companies to meet their QPD obligations is expected to significantly drive demand for the local unit.

This will possibly lead to significant firming of the local unit on the official market.

The Sunday Mail has gathered that some companies that predominantly transact in the greenback have since begun actively seeking ZiG to be able to fulfil their tax obligations by June 25.

In an interview, RBZ Governor Dr John Mushayavanhu said there was enough reserve money to support all the economic transactions during this period.

“Businesses shall pay 25 percent of their annual corporate income tax by June 25, 2024, and are expected to pay at least 50 percent of the income tax due in ZiG,” he said.

“Given that the reserve money is also used to support all the economic transactional activities, it would be inadequate at its current levels if the corporates were to pay the entire tax amount due simultaneously on June 25, 2024.

“Companies, however, start paying the QPDs two weeks before the due date and that money will be reinjected into the system through Government expenditure (paying of civil servants’ salaries).”

This, Dr Mushayavanhu said, will alleviate pressure on ZiG demand.

“Moreover, the Reserve Bank will be on the watch to ensure that smooth national payments and settlements are maintained,” he said.

“Companies may, however, need to unwind their US dollar positions at the exchange rate determined by holders of ZiG.

“It is, thus, important and strategic for companies to start accumulating ZiG now to avoid getting the same at a more appreciated exchange rate.”

Dr Mushayavanhu said although ZiG is expected to firm, RBZ will ensure the currency remains within the desired stability bands.

“The requirement to pay 50 percent of June QPDs in ZiG is expected to further boost domestic currency demand and consolidate the exchange rate stability currently obtaining in the economy,” he said.

“By and large, the ZiG:US dollar exchange rate is expected to strengthen around the QPDs period and in the near term.

“The bank will, however, deploy appropriate intervention strategies to ensure that the exchange rate remains within the desired stability bands since an excessively strong exchange rate has competitiveness and deflationary effects.”

In contrast, Dr Mushayavanhu added, exchange rate depreciation had an inflationary impact.

“Both higher inflation and deflation are not good for macroeconomic stability and growth, hence the need to keep the exchange rate and inflation within growth-enhancing levels,” he said.

“These are policy imperatives that guide the Reserve Bank’s priority focus to ensure currency and exchange rate stability.”

The official exchange rate stands at US$1:ZiG13,48.

According to experts, when there is higher demand for a local currency relative to its supply, its value will rise, a fundamental principle of supply and demand.

The more people or entities want to hold or use a currency, the more valuable it becomes.

Economist Dr Prosper Chitambara said: “This obviously creates excess demand for ZiG, which is critical for its sustainability. That is obviously a good thing.

“It is important for ZiG to continue strengthening because the economy needs that micro-economic stability.”

In April, ZiG replaced the Zimbabwe dollar, whose value had been sliding since the beginning of the year.

ZiG is backed by a basket of precious minerals — mainly gold — as well as foreign currency reserves held by the central bank.