Here at Zimpricecheck, we pride ourselves on staying attuned to the pulse of the Zimbabwean economy. One of the ways we achieve this is by venturing out into the bustling streets of Harare, engaging with vendors and informal businesses to gather firsthand market intelligence. On a recent expedition into the high-density suburbs, we uncovered a rapidly developing phenomenon: a surge in demand for ZiG notes.

Our initial encounter occurred while attempting to purchase 100g of ZapNax crackers, a popular snack. Typically, vendors in Harare sell these at a rate of four packets for US$1. However, on this occasion, the vendor only provided three packets when presented with a US dollar. While this is not uncommon as some vendors do sell at this price, what followed piqued our interest.

A child from a nearby house offered $40 ZWG (Zimbabwe Gold), equivalent to one US dollar at the prevailing official exchange rate, and received four packets. Intrigued, we engaged the vendor in conversation. They expressed a preference for receiving ZiG, but were initially hesitant to reveal the underlying reason. Eventually, they disclosed that each packet was now effectively selling for $10 ZWG, a figure that deviates from the expected US$0.25 equivalent based on official rates.

This interaction served as the catalyst for a deeper investigation. Based on our initial observation, the vendor was operating on an implied exchange rate of $30 ZWG per US$1, as evidenced by the pricing of the ZapNax. This represents a significant shift from the previously established rate of $40 ZWG per US$1. However, when questioned about the ZiG equivalent of US$0.50, the vendor quoted $20 ZWG, not $15 ZWG. A subsequent, albeit informal, survey of vendors in the area revealed that this practice was becoming increasingly widespread. Vendors readily accepted ZiG notes at a rate of $40 ZWG per dollar, but exhibited reluctance to dispense ZiG notes as change at the same rate when customers paid using US dollars. Through careful observation, we were able to uncover the motive behind this emergent trend.

The Liquidity Crisis: A ZiG Note Shortage

The US dollar continues to reign supreme as the preferred currency in Zimbabwe. While the South African Rand is sometimes utilised for change in southern regions, Harare and its surroundings predominantly rely on ZiG notes for this purpose. As we noted last year, around November, there was a surfeit of ZiG in the market. This resulted in the ZWG to USD exchange rate climbing to $40 ZWG per US$1.

In response, the public engaged in a familiar practice: the informal demonetisation of ZiG coins. Despite repeated warnings from the Reserve Bank of Zimbabwe (RBZ) asserting the legality of coins like the $5 ZWG, the public largely ignored these pronouncements. This is not an unfamiliar dance, as we have observed before; the public often chooses to ignore the RBZ. The $10 ZWG note effectively became the smallest denomination in circulation, supplanting the $5 ZWG coins, which were almost universally rejected by the informal sector. These coins, finding no acceptance, were never reintroduced into circulation when deposited into banks, eventually vanishing from circulation.

This development was largely inconsequential at the time, as the coins were deemed largely unnecessary. Most transactions are conducted in US dollars, with electronic ZiG transactions also prevalent. As mentioned previously, ZiG notes are primarily employed for dispensing change. The cash exchange rate remained consistent at $40 ZWG per US$1. Many items in the informal sector are priced at US$0.25 or US$0.50, making the provision of change in ZiG relatively straightforward. When customers paid with a US dollar for goods worth US$0.50, they would receive $20 ZWG in change, allowing transactions to proceed smoothly.

However, the situation began to shift when the RBZ and the Ministry of Finance decided to tighten the screws on the economy. Generally, the bulk of ZiG in circulation originates from two government-affiliated sources: 1) Salaries of government and state institution employees and 2) Payments to government contractors and suppliers. The latter represents the most significant source of ZiG in the market, but this has been curtailed in recent months, resulting in liquidity challenges. The government also simultaneously increased demand for ZiG. Importers of motor vehicles are now mandated to pay in ZiG. Certain taxes and government payments must also be settled in ZiG. ZESA (Zimbabwe Electricity Supply Authority) tokens, a primary driver of ZiG demand, also require payment in ZiG. This increased demand coupled with a reduced supply has resulted in the electronic ZiG exchange rate falling. Rates for large amounts have declined from $40 at the beginning of December to approximately $35 ZWG per dollar for those with substantial US dollar holdings and the common rate now sits at $30 ZWG per US$1.

This means that if you hold US dollars and wish to acquire ZiG or make ZiG-denominated payments, black market traders will facilitate the transaction at a rate of $30 per US$1. This applies only to electronic ZiG and not to ZiG cash. It is crucial to remember that the $5 coin is no longer in circulation. Therefore, vendors and traders are unable to provide change for US$0.50 when operating at a rate of $30 ZWG per US$1, as the required change would be $15, for which there is no corresponding note, with only the $10 ZWG note in circulation.

While seemingly insignificant, this scenario presents a considerable arbitrage opportunity, one that Zimbabweans, renowned for their acumen in exploiting such gaps, are capitalising on. Consider a vendor who receives US$100 worth of ZiG in cash, equivalent to $4000 ZWG. By depositing this amount into their bank account, selling it to someone seeking ZiG, or using it to sell airtime and electricity at a rate of $30 ZWG per US$1, they can effectively generate sales worth US$133, yielding a staggering 33% profit. This explains the newfound enthusiasm for ZiG among vendors, who are capitalising on this glaring discrepancy. The hasty rejection of the $5 ZWG notes has created an irreversible situation.

Implications of This Development

This emergent trend has several potential implications:

1. Change Shortages: Hoarding of ZiG notes could lead to change shortages, disrupting everyday transactions.
2. Increased Reliance on Electronic Transactions: The shortage of physical currency may further propel the adoption of electronic payment methods, particularly for smaller transactions.
3. Rise in Black Market Activity: Individuals and businesses seeking to exploit arbitrage opportunities may turn to the black market, potentially destabilising exchange rates.
4. Inflationary Pressures: If the government prints more ZiG to address the shortage, it could exacerbate inflationary pressures, undermining the currency’s stability. As we discussed in our article on the case for larger ZiG notes, the denominations are too low for practical use.
5. Distrust in the ZiG: The public may further lose confidence in the ZiG if the arbitrage opportunities persist and the currency’s value continues to fluctuate.

Frequently Asked Questions

• What is arbitrage? Arbitrage is the practice of taking advantage of price differences for the same asset in different markets to make a profit.
• Why is there a shortage of ZiG notes? A combination of reduced government spending (less ZiG being released) and increased demand for ZiG (for taxes, ZESA tokens, and car imports) has created a shortage.
• What can be done to fix this problem? The government could increase the supply of ZiG notes, but they would have to do so carefully to avoid inflation. They could also try to reduce demand for ZiG, perhaps by allowing taxes and other payments to be made in US dollars.
• Is this going to cause hyperinflation? Not necessarily, but it could worsen the situation. Hyperinflation is caused by a loss of confidence in the currency, which could occur if people feel like they are being forced to use a currency that is losing value.