ZiG stability inspires business confidence: RBZ Governor

Source: The Herald – Breaking news.

ZiG stability inspires business confidence: RBZ Governor 
Dr Mushayavanhu

Prosper Ndlovu in VICTORIA FALLS 

THE sustained pricing and exchange rate stability since the introduction of the ZiG currency has inspired business confidence as more in the economy embrace the local unit, Reserve Bank Governor, Dr John Mushayavanhu, said yesterday.

The ZiG replaced the Zimbabwe dollar as the local currency in early April and has made slight positive gains against the US dollar in the last two months.

Speaking at the Annual Mining Conference underway here, Dr Mushayavanhu gave a positive outlook in his economic assessment report.

Backed by precious minerals, mainly gold, and a basket of foreign currency reserves, the ZiG was trading at US$1:ZiG13,3 at the mid interbank rate yesterday, strengthening slightly from US$1:ZiG13,56 at its introduction.

More businesses have smoothly switched to transacting in ZiG and prices have remained relatively stable, with minimal exchange rate movement.

“The economy continues to show strong performances across all the sectors since the introduction of the ZiG, and there is no evidence of disruptions in business. In fact, the ZiG has strengthened against the US dollar,” said Dr Mushayavanhu.

“The economy witnessed a smooth transition to the new normal (ZiG environment) without perceived or real loss of value to the public. There is relative exchange rate stability as shown by minimal exchange rate misalignment and volatility, a critical condition to safeguard and preserve value on forex surrender by exporters.”

Dr Mushayavanhu said the exchange rate stability has led to significant price stability, as evidenced by a decline in month-on-month inflation for ZiG to minus 2.4 percent in May 2024.

He said the Reserve Bank had moved past explaining the ZiG and the monetary policy and was now seized with the appraisal of the performance of the new currency, while it walked the talk in fulfilling its commitment to stakeholders.

“The bank is committed to stay on course of the current trajectory to ensure that inflation and exchange rate expectations are firmly and sustainably anchored.” 

The Reserve Bank, he said, was not surprised by the positive gains from the new structured currency, whose benchmark design was deliberately made to boost stable exchange rates and prices into the future.

“The bank has demonstrated commitment to backing the ZiG and has so far been ‘walking the talk’ in ensuring that the monetary base is fully backed and in line with economic activity,” Dr Mushayavanhu said.

The RBZ Governor was optimistic that the ZiG would register further gains by next month, when the payment of 50 percent quarterly tax requirements in local currency becomes due, which will further boost demand for the domestic currency and consolidate market stability.

“As such, the stability in the exchange rate is expected to spur mining growth, which has already been growing as shown in the ensuing discussion,” said Dr Mushayavanhu.

Zimbabwe has been receiving increased foreign currency inflows since 2019, driven mainly by the solid growth in exports, mining earnings, improved manufacturing sector capacity utilisation and resilient diaspora remittances, which pumped in US$3 billion last year.

There has also been increased foreign direct investment, which jumped from US$185 million to US$376 million last year.

However, mining contribution dropped from 49 percent in 2022 to 38 percent last year, as a consequence of a decline in international commodity prices and a rise in non-mining exports.

But with the general growth in foreign currency inflows, Dr Mushayavanhu said the recalibrated monetary policy is expected to stabilise the exchange rate and provide value to generators of foreign currency, including the mining sector.

“International experience has shown that a structured currency tends to derive its value from the underlying backing assets. In this regard, the ZiG is expected to be stable in line with mineral prices and inflation differentials between ZiG and US$ inflation,” he said.

Going forward, the RBZ Governor said the mining sector was expected to play a pivotal role in ensuring stability of the ZiG through the export surrender requirements, under which 50 percent will be used to liquefy the interbank market and ensure that all bonafide forex invoices were met.

Similarly, 25 percent of the export surrender funds would be used to meet foreign currency obligations transferred to Government, and a further 25 percent for building foreign currency reserves to support the de-dollarisation roadmap 2030.

Dr Mushayavanhu said the mining sector could also support the stability of the domestic currency through procurement in ZiG, as well as increasingly buying locally produced goods and services. 

He said the continued stability of the ZiG ensured that miners did not lose in the process, and was confident that the structured currency would result in the dissipation of inflationary pressures in the short to medium term.

“Inflation expectations are anticipated to be well-anchored towards the observed trend of domestic US dollar inflation. Month-on-month inflation of below one percent and annual inflation of between 2 to 5 percent,” said the RBZ Governor.

He also said growth prospects for 2024 remained positive and would be boosted by robust mining activity, exchange rate and price stability, notwithstanding the devastating impact of the El-Nino drought.