ZiG falls 44%: RBZ devalues currency 'with gold' as economic pressures rise, ZBC, ZINARA etc. raise taxes quickly

Harare – In a dramatic move that reflects Zimbabwe’s deepening economic problems, the Reserve Bank of Zimbabwe (RBZ) has devalued the gold-backed ZiG by 44%.

The official exchange rate is now at 24.39 ZiG to the US dollar, down sharply from the previous rate of 13.98. State-owned enterprises ZBC and ZINARA wasted no time in adjusting their fees upwards to reflect the new devalued rate.

The drastic measure comes after months of mounting pressure on ZiG, the nation’s sixth attempt at a local currency since 2009. Despite initial promises from RBZ Governor John Mushayavanhu that lessons had been learned from past failures, ZiG has struggled to find stability amid persistent inflationary pressures and a widening gap between official and parallel market exchange rates ..

Friday’s announcement, communicated through a directive to banks and financial institutions, effectively confirms the devaluation, although the RBZ did not explicitly say so.

Governor Mushayavanhu, in a statement, highlighted the central bank’s efforts to combat inflation, including allowing “greater exchange rate flexibility in line with the increased demand for foreign currency in the country”.

The devaluation follows a period of relative economic calm between April and mid-August 2024. However, as highlighted in the RBZ statement following the Monetary Policy Committee (MPC) meeting on 27 September 2024, exchange rate pressures are resurgent, a premium of the growing parallel market, and rising inflation forced the bank’s hand. Monthly inflation, which averaged -0.82% between May and July, rose to 1.4% in August and is expected to rise further in September.

Despite a 13.4% year-on-year increase in foreign exchange inflows to $8,465 million in the first eight months of 2024, the parallel foreign exchange market continues to thrive. ZiG trades at a premium exceeding 100%, reaching 30 ZiG per US dollar on the black market. Retailers have openly defied government directives to price goods at the official exchange rate, opting instead to use US dollar prices or adjust ZiG prices to mirror the parallel market..

In response to these challenges, the MPC implemented a series of measures, including a significant increase in the banking policy rate from 20% to 35% and an increase in statutory reserve requirements for demand and demand deposits to 30%, with effect immediate.

“The MPC is confident that these measures will help address emerging exchange rate risks, anchor inflationary expectations and stabilize prices in the near and short term,” Governor Mushayavanhu said.

Other measures include a reduction in the foreign exchange allowance for people traveling abroad from $10,000 to $2,000. The move to greater exchange rate flexibility is also seen as an attempt to manage growing demand for foreign currency.

The devaluation underscores the RBZ’s ongoing struggle to stabilize the ZiG, which was launched in April 2024 at a rate of 13.56 to the dollar. ZiG traded at 13.9883 on Thursday before falling to 24.3 after the RBZ announcement. This drastic step is widely seen as a direct response to escalating inflation and the increasing difficulty of enforcing official exchange rates on the market.

Adding to the complexity of the situation, the Zimbabwe Revenue Authority (ZIMRA) on Thursday issued a statement urging businesses and individuals to report companies that refuse to accept ZiG or manipulate Point of Sale (POS) systems to force payments in US dollars..

The quick reaction of state-owned enterprises such as ZBC and ZINARA, which promptly raised their fees to reflect the new exchange rate, highlights the immediate impact of the devaluation. While some retailers have followed suit, others, including insurance companies and some fast-food outlets, have been slower to adapt, creating short opportunities for those looking to exploit the rate disparity.

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