Zimbabwean businesses are currently navigating a strangling liquidity crisis, marked by a peculiar dual challenge: a shortage of both the local ZiG (Zimbabwe Gold) currency and the coveted United States dollar. This isn’t a simple case of overall scarcity; instead, it’s a complex situation where the formal and informal sectors are struggling with distinctly different, yet interconnected, liquidity issues.

On one side, we have the informal sector desperately seeking ZiG. For weeks now, social media platforms have been awash with individuals and small businesses frantically searching for the local currency. This is a stark contrast to the situation late last year, when the demand for USD was higher on social media with most black market players searching for USD . The immediate need for ZiG stems from the necessity to meet statutory obligations such as paying for electricity through ZESA, import duties on motor vehicles, and other government-related services.

The current reality is that the black market, typically a readily accessible source of currency exchange, is experiencing a drought of ZiG. It is interesting that those who hold RTGS (Real Time Gross Settlement), the electronic form of the ZiG, are now in a position to pick and choose their clients. While the prevailing exchange rate seems to be around $35 ZiG to 1 USD, this favourable rate is largely reserved for high-value clients. Most people are getting ZiG at a rate lower than this with $34 ZWG per 1 USD being the most dominant although we have seen rates as low as $30 ZWG per 1 USD. On rare occasions we have seen some very large clients managed to negotiate rates as high as $36 ZiG per 1 USD but this is very rare. The prevailing sentiment is that ZiG is scarce, and it is becoming increasingly difficult for the average informal trader to obtain the local currency.

The Formal Sector’s USD Woes

The other side of this economic coin is the formal sector, which is encountering a separate set of challenges. These businesses primarily rely on the official Interbank Market, specifically the “Willing Buyer Willing Seller” (WBWS) platform, to source their foreign currency needs. However, the WBWS platform is increasingly showing signs of strain. There is a notable complaint from businesses that the market is now dominated by buyers of foreign currency rather than sellers. The market appears to be short of USD, making it difficult for formal businesses to secure the essential foreign currency needed for operations and imports.

The Zimbabwe National Chamber of Commerce (ZNCC) has also voiced concerns about this scarcity of United States dollar sellers on the WBWS platform, suggesting it is undermining the productive sector’s capacity to operate effectively. The WBWS system, introduced in January 2024 as a replacement for the Foreign Exchange Auction System, was meant to provide a more accurate reflection of market rates. Instead, it seems to have created an environment where demand vastly outstrips supply. As the ZNCC states, the lack of willing sellers has hampered the WBWS’s ability to meet the foreign currency demands of the formal sector, which in turn suppresses overall economic activities.

Understanding the Dual Shortage

This dual currency challenge can be attributed to a complex web of factors. Several reasons explain why the informal sector is facing a ZiG shortage:

Firstly, the informal sector often receives its ZiG supply through contractors paid by the government. When these contractors receive payment, they typically rush to the black market to offload their ZiG, often leading to spikes in the exchange rate. However, there are strong indications that the government is yet to disburse payments to contractors and has scaled back expenditure, creating a drought of ZiG in the informal sector.

Secondly, a significant portion of informal traders are reluctant to engage with the formal financial system. They view the official exchange rate, currently around $26 ZiG per 1 USD, as artificially low and not a true reflection of the market. Even major retailers such as OK and Pick N Pay are using exchange rates above $30 ZiG. Consequently, it is not in the interest of informal traders or individuals to take their USD to the formal market when the black market, even at its current rate, provides a better rate of return.

Thirdly, there is a deep-seated fear within the informal sector of depositing money into formal banks. The Reserve Bank of Zimbabwe’s (RBZ) Financial Intelligence Unit (FIU) has a history of freezing accounts of those suspected of engaging in black market activities, creating a distrust of the banking system. Furthermore, the cost of transacting in RTGS, including the Intermediated Money Transfer (IMT) tax and bank charges, coupled with increased scrutiny from agencies such as ZIMRA, makes it unfavourable to maintain large balances in bank accounts.

On the other hand, formal businesses are reluctant to plunge into the black market for fear of the consequences of falling foul of the FIU. The risk of having accounts frozen and suffering financial penalties is deemed too high.

Two Struggling Economic Islands

This interplay of factors has created what can be described as two struggling economic islands. The formal sector, in dire need of USD, is unable to source it effectively from the official market, which is short on sellers. Meanwhile, the informal sector, desperate for ZiG to fulfil its statutory obligations, is facing a severe shortage of the local currency. This situation highlights the complex challenges facing the Zimbabwean economy and underscores the need for a more nuanced and balanced approach to currency management. It is a stark reminder that both the formal and informal sectors are essential to the economy’s overall health and need policies that facilitate, rather than hinder, economic activity. The current currency dynamics are a significant barrier to that.