For many Zimbabweans, the mere mention of local currency evokes memories of economic instability and past financial hardships. Memories of sleeping in bank queues, desperately trying to access meagre savings, are etched in our collective consciousness. I personally remember spending hours at Standard Chartered, hoping to withdraw a paltry US$100, only to be met with dismissive laughter from the branch manager. This experience, sadly, was not unique, and it drove many of us to embrace the United States dollar as a more reliable store of value.

The preference for cash in Zimbabwe is deeply rooted. Policies like the sudden currency switchover last year, which locked people out of their bank accounts for a week, coupled with the despised 2% IMT tax on electronic transactions, have eroded trust in the banking system. Moreover, exorbitant bank charges, which often exceed the negligible interest earned on deposits (a paltry 5% per annum), further disincentivise keeping money in accounts. Some banks even charge you to check your balance! It is little wonder then that many Zimbabweans rush to withdraw their funds as soon as they receive them, converting electronic balances into tangible cash.

Against this backdrop, our advice today might seem counterintuitive: If you currently hold ZiG in your bank account, resist the urge to withdraw it. This counsel, crucially, does not extend to US dollar accounts. Feel free to empty those if you so wish. The peculiarity arises from a rather unique arbitrage opportunity that currently exists, where the value of electronic ZiG significantly exceeds that of its cash counterpart by as much as 25%.

The ZiG’s Devaluation and the Cash Crunch

Let us rewind to around November of last year. When the ZiG (Zimbabwe Gold) was initially introduced, the official exchange rate was approximately US$1 to $14 ZiG. The Reserve Bank of Zimbabwe (RBZ) confidently declared that the ZiG was backed by gold reserves, even showcasing images of this supposed gold stored within the RBZ vaults. They solemnly pledged never to increase the money supply without a corresponding increase in the gold and mineral reserves backing the currency.

Some doubts arose when the government admitted that a portion of the gold reserves backing the ZiG were stored in a secret foreign location due to alleged security concerns. The Zimbabwean government does have a history of stretching the truth when it comes to such matters, but for the first six months, relative stability reigned. Then, suddenly, the ZiG rate on the black market plummeted to US$1 to $28 ZiG. In typical fashion, the government initially resisted this depreciation before ultimately, and rather abruptly, devaluing the ZiG. The official exchange rate now stands at 25 ZiG to US$1. This devaluation led to weeks of uncertainty, with the rate peaking at US$1 to $40 ZiG for weeks.

Sensing the public mood, the government decided to curb excessive money supply. Payments to government creditors were placed under intense scrutiny by the Treasury, and many were put on hold. Amidst this chaos, the informal sector made a decision that now appears somewhat unwise: they began rejecting $5 ZiG coins, which were eventually demonetised and withdrawn from circulation. While this was not a major issue when the rate was US$1 to $40, as ZiG was primarily used for small change, the subsequent scarcity of ZiG led to its appreciation against the US dollar. Currently, the black market rate hovers around US$1 to $30 ZiG.

However, this creates a problem. A rate of $30 ZiG to US$1 is unwieldy for cash transactions. It means US$0.50 would be equivalent to $15 ZiG. But it is not possible to give out this amount because there are no $5 ZiG in circulation. The smallest ZiG denomination is $10 ZiG. As a result, the cash rate has remained stubbornly fixed at US$1 to $40 ZiG. This discrepancy has spawned considerable arbitrage opportunities, as we have previously discussed.

Why Withdrawing ZiG is a Bad Idea

Currently, if you have $3,000 ZiG in your account, that is approximately US$100 at the prevailing black market rate. Due to the limited availability of ZiG in the market, you can readily convert this electronic money into US dollars. You can, for instance, purchase ZESA electricity tokens for neighbours, family and friends and receive US dollars in return. Finding people who are willing to accept ZiG in exchange for US dollars will not be difficult.

In stark contrast, if you withdraw the same $3,000 ZiG as cash, you immediately lose value, especially when transacting in the informal sector. Assuming no transaction charges (which are irrelevant to this particular analysis), that $3,000 ZiG in cash will only fetch you US$75 at a rate of $40 ZiG to US$1. By simply withdrawing your money, you would have effectively lost US$25. The vendor receiving that cash will likely deposit it back into the bank, profiting from the arbitrage opportunity that you unwittingly surrendered.

Financial Self-Sabotage in Plain Sight

We appreciate that this situation might have seemed obvious, given our previous discussions on arbitrage. However, the sight of scores of people queuing at the Homelink outlet near Copacabana bus stop to withdraw ZiG cash was genuinely alarming. These individuals were, in effect, engaging in financial self-sabotage.

Therefore, our advice is clear: unless absolutely necessary, refrain from withdrawing ZiG from your bank account. The electronic ZiG is currently more valuable than its cash equivalent. Exploit this arbitrage opportunity to your advantage. Avoid cashing out and losing a significant portion of your money. Instead, explore ways to utilise your electronic ZiG for transactions that reflect its true value.

Frequently Asked Questions

• What is arbitrage? Arbitrage is the practice of exploiting price differences for the same asset in different markets to make a profit. For example, buying something in one market where it is cheap and immediately selling it in another market where it is more expensive.
• Why is there a shortage of ZiG notes? The Zimbabwean government is wary of printing too many physical notes. It is expensive to make these notes and often these go out of circulation as soon as the currency loses value. Excessive supply is also easy to discern just by looking at the notes in circulation. Since 2008 the government has refrained from printing too many physical notes.
• What can be done to resolve this issue? The government could increase the supply of ZiG notes, but this must be done cautiously to avoid fuelling inflation. Alternatively, they could reduce the demand for ZiG, perhaps by permitting the payment of taxes and other obligations in US dollars.
• Will this lead to hyperinflation? Not necessarily. Hyperinflation is triggered by a loss of confidence in a currency. This could occur if people are forced to use a currency that is perceived as losing value.
• Is the government going to demonetise the ZiG? There has been no suggestion of this happening so far although as history has shown in Zimbabwe anything is possible.