Stabilizing the ZiG Under a Wave of Speculative Attacks

By Chinedu Okoye

Background Story:

Bloomberg reported that "Zimbabwe’s central bank vowed to “double efforts” against currency saboteurs it blames for fanning the decline of the nation’s bullion-backed unit on the parallel market."

This comes as the ZiG has seen a huge spread between parallel market rates and official market rates. The street value of ZiG was reported to be between 16 - 26 ZiG/$,  in the street even though it trades for just under 14ZiG/$1, as traders and individuals increasingly quote "implied exchange rates when selling goods".

This scenario could lead to deteriorated ZiG price conditions fueled by speculation speculative attacks on the currency. We analyse the situation in comparison to our earlier expectations at Zero Equilibrium and explain the discrepancies, concluding with broad monetary policy suggestions.

ZiG under Attack:

The ZiG seems to be under attack by currency speculation in the Parallel market, this follows the ZiG price inflation that was experienced on the first week of the new currency's roll out, as merchants were wary of the availability of the ZiG reluctant to switch to the new currency.

The speculation going on would indicate a bearish expectations for the ZiG, following the earlier reluctance. The fall in the ZiG/USD pair as inidcated by the Chart below from Trading View is bound to reinforce Zimbabwean inflation numbers.

(ZiG/USD early trading hours Friday 13/09/2024)

ZiG - Gold Divergence: Acceptance Derailing a Market Determined Value:

 

Given gold's steady rise and resilience against the US Dollar, we had earlier expected a close - albeit lagged - positive correlation between the yellow metal and the ZiG. This we also expected to tame prices, however we didn't input currency speculation as a factor that could derail the market reflective value of the ZiG.

(Gold Futures v USD)

Acceptance and skepticism from unchanged monetary fundamentals seem to be derailing a market determined value of the ZiG and preventing the correlated move with Gold - i.e., a market determined rate. 

Weakness Outweigh Strength:

The strength of the ZiG depends on a combination of macro fundamentals (inflation, GDP, external debt, etc.),Gold prices, market demand, it's convertibility. But more important is macroeconomic stability.

The weakness experienced is attributable to; currency speculation, limited acceptability, largely unchanged balance of payments, economic instability (high inflation rates) all these have heightened reactions to perceived political and economic instability.

Despite the perceived relatively solid fundamentals, and for reasons stated above, the ZiG continues to be weighed down by the speculative attacks, stemming from the currency's over reliance on gold backing.

This highlights need for a comprehensive approach to managing the country's economy and currency and prompts a monetary policy reaction to manage this fallout in expectations.

Monetary Policy Reaction:

This prompts two immediate reactions from the Zimbabwean Central Bank.

(i). Monetary Contraction: A tightening in money supply would suck in the excess ZiG from the FX market and reduce the firepower of speculators.

(ii). Exchange Rate Policy Tweak: A market determined ZiG, and a tightly regulated FX market where all exchange rate market stakeholders (Banks and Non-bank Currency exchange service providers) are incorporated into a common regulatory framework where all actions could be monitored and controlled by the Central Bank.