ZiG Is Doomed, Eddie Cross Warns RBZ Governor

Outspoken local economist Eddie Cross, who also serves as an adviser to President Emmerson Mnangagwa, has issued a stark warning to Reserve Bank of Zimbabwe (RBZ) governor John Mushayavanhu: the new Zimbabwe Gold currency (ZiG) is heading towards failure unless the central bank alters its current approach.

In an open letter, Cross disagreed with Mushayavanhu’s assertion that the central bank’s strategies are effective, saying if the current trajectory continues, the ZiG is destined for disaster. He wrote:

No, Mr Governor, that will not work.

I have a deep respect for the intellectual and institutional capacity of our Reserve Bank. That is based on what I know of the new man on the block and his staff at the Bank.

But I listened to him carefully last week when he defended his position on the new currency. He was emphatic – what we are doing is working and will work. The ZIG is here to stay!

I disagree. If you stay your course Mr Governor, your new currency is doomed, and more quickly than you think. I was at breakfast a week ago with some major figures in the mining industry.

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They were recounting that since April, they had been getting ZIG denominated treasury bills as payment for the 25 per cent of export earnings that they were selling to the Bank. Two-year TBs at 6 per cent interest.

Our Exports are running at a US$1 billion a month. So, 25 per cent liquidation into local currency involves about US$250 million a month or US$3 billion a year. For exporters this translates into ZIG17 billion over the past 5 months.

That week the Governor had devalued those TBs by 84 per cent – wiping out ZIG 14 billion with the stroke of a pen. But that represents a gross deduction from the earnings of all Exporters.

At the same time, it gave the Ministry of Finance access to US$1,250 billion to use as it deemed fit, now devalued by 84 per cent.

Great for the Secretary for Finance who must look after the affairs of Government – cheap currency for anything they might want. What happens next is that they announce an increase in Civil Servants hard currency allowances, in complete contradiction to the stated policy of dedollarisation. But it’s not good economics or even business, in fact it’s the very opposite.

Then the Deputy Minister of Finance came out and said we have to move towards dedollarisation. Anything else is suicide for our productive economy. But everything they are doing is the very opposite of what is actually needed.

I simply do not see how any sane Government can take away from its exporters 25 per cent of their gross earnings and pay for it with pieces of paper called Treasury Bills with a totally artificial face value at 6 per cent interest over 2 years. How do you expect anyone to survive?

They are doing this so that they can claim they are not printing money. Of course they are, all they are doing is differing payment in the new paper currency.

They are printing money to pay the Civil Service and some suppliers in local currency and the evidence of this is the very fact that in the past 5 months, the formal economy has gone from 85 per cent in USD transactions to 25 per cent.

All formal sector firms are holding huge balances in ZIG and in a desperate attempt to prevent these balances going into the market to buy hard currency at any price, they increased the percentage of all bank balances that had to be held in the Reserve Bank.

None of this makes any difference to the future of the ZIG. The word on the street is that it is worthless. Can we really disagree?

When our Reserve Bank was printing Nostro dollars back in the period from 2014 to 2018, we ended up in 2019 with US$23 billion in our bank accounts.

At that time, we did not even have a name for it – that came later when our new Minister of Finance said that those dollars, were not real, they were RTGS (Real Time Gross Settlement dollars).

I was a Member of the MPS at that time and I said in a RBZ Meeting, that if I took 1000 ‘dollars’ down to the tellers on the ground floor and was given US$1000 in exchange, that in 15 minutes the news would spread, and we would have a queue outside the building kilometres long.

When finally, the new Minister ordered that our accounts be differentiated into real US$ balances and RTGS dollar balances, we had a short period of stability and then the latter crashed and in 8 months our RTGS balances were down to 15 per cent of their former value, by inflation. God help us if we start printing Nostro dollars again, but the ZIG is a totally different matter.

I have seen references to the ZIG as a ‘gold backed currency’. That is of course complete nonsense. The Governors reference to ‘sufficient reserves’ to protect the currency is also nonsense.

The ONLY test of a currency is its convertibility on demand. Surely any street kid knows that. It’s a piece of paper with printing on it and if you can read English, it says it has a value which is printed on its face. It also has security features so that it is difficult (but not impossible) to counterfeit.

However, the only test which it has to meet to be of any value is its convertibility on demand. Fail that test and it is dead. I remember Gono’s 100 trillion-dollar notes, lying on the street and people walking over the stuff in 2008.

So how to get there. Its not a question of resources, we are swimming in US dollars. It’s not a question of the macroeconomic fundamentals – we are not printing money to cover a fiscal deficit. It’s just how to make the local currency freely convertible into a currency with which we can trade.

The biggest threat of the present set of policies is that we are again feeding Government with hard earned foreign currency at undervalued exchange rates. Remember Dr Gono handing out tractors and luxury cars to everyone.

Today the ‘Father Christmas’ in Government is the Secretary for Finance, a very comfortable position to be in and very powerful. But completely wrong.

There is no reason why this should be tolerated. If Government wants hard currency for something, they should buy it off the market like everyone else.

Then the stuff would have real value, and the real cost would be reflected in how Government spent its tax dollars.

The only way to restore sanity to our economy and stability to our money market is to increase the flow of hard currency to the interbank market where all those who need foreign exchange for whatever purpose, can buy it at a real market price or exchange rate.

If we cannot introduce all the measures required to achieve this in a short period, then what we must do is take the currency being liquidated on a compulsory basis, and allow the banks to sell that currency, in ZIG on the interbank market, without restraint.

In the event that this does not satisfy demand, then increase the liquidation threshold until the currency stabilises.

I would go the whole way in this process until the value of the ZIG is restored to about 12 to 1 against the US dollar in the market and then start buying hard currency off the market at 12 to 1 and putting the currency into national reserves.

Even better would be to take this currency and buy gold, hold our reserves in gold rather than paper dollars in electronic form.

I would convert the national budget to ZIG in its new form and make all taxes payable in ZIG. Eventually you could dedollarise and use the ZIG as the sole means of exchange.

Leave free funds in Nostro accounts and allow owners to use these funds at their discretion. Sorry to be so blunt John, but it is the only way to go forward.

Eddie Cross
Harare, 14th October 2024

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