Will the ZiG kill Zimbabwe’s foreign currency black market?

The ZiG is barely a week old. It was introduced last Friday, on 5 April, in a surprise but widely anticipated move by the new Reserve Bank of Zimbabwe governor Dr John Mushayavanhu. On Monday the official rate between the USD and the ZiG was US$1 : 13.56 ZiG, by yesterday morning the ZiG had gained against the dollar and trading at US$13.53. Today as I write this, 10 April 2024, the ZiG is now officially being traded at US$1: 13.50 ZiG. Some airtime vendors are selling ZiG airtime at an astounding rate of US$1: 10 ZiG suggesting the rate could be higher.

All these rates have led a certain segment of society led by government officials and state media to somehow conclude that the ZiG will be the thing that finally ends Zimbabwe’s enduring foreign currency market. We think this is the wrong conclusion to draw from the current events. We honestly do not think that the ZiG will kill Zimbabwe’s foreign currency black market. We can easily explain the current chain of events.

Most banks are still converting their systems to ZiG

First off, there is not much buying and selling of the ZiG currency taking place officially and unofficially. The reason for this is that while Ecocash and other banks have completed migrating their systems from ZWL to ZiG a lot of institutions haven’t completed their migration. CABS, one of Zimbabwe’s major banks only completed the migration late yesterday. This means that CABS account holders were not using their ZiG accounts yesterday when the current rate of 13.50 ZiG to 1 USD was achieved. Most of the biggest banks including CBZ, FBC, Steward and BancABC are still migrating from ZWL to ZiG.

• Their account holders, including active parallel market traders, are not currently active on the market. This means that there is not much supply of ZiG on the forex black market yet as a lot of people are still not yet able to access their ZiG accounts.
• These banks led by CBZ, FBC, Steward and CABS own most of the swipe machines you see operating out there. So even though several banks had completed the migration to ZiG, those people couldn’t pay using ZiG in shops like Pick N Pay because the swipe machines of most businesses are not yet working.
• Civil servants the largest group of people to earn ZiG (formerly ZWL) had already completed most of their transactions for the month and used up most of their ZiG. There will be movement when they eventually receive this month’s payment and go out in search of the USD.
• Airtime sellers have been using a rate that is about 10% lower than the official rate for months. They can afford to do so because Mobile Network Operators sell their ZiG (formerly ZWL bundles) at prices that are lower and more favourable compared to USD bundles. You can do a quick check on Econet by dialling *143# and selecting ZiG bundles.

Here is why we think the black market will live on ZiG or no ZiG

Understandably, a large segment of society wants the ZiG to succeed. Even those of us who are sceptical also want the ZiG to succeed but experience has taught us to be skeptical. One can be hardly faulted for asking hard questions after witnessing the disaster that was the bond notes (ZWL) era. We started at US$1:$1 ZWL and ended up at US$1: $40 000 ZWL. The government swore they had a US$200 million facility and would never print more than this. They tried to be clever by minting electronic ZWL instead of notes and coins but in the end, they could never hide the brimming supply of too much ZWL in the market. The ZWL had lost about 95% of its value since 1 January 2024 before the new governor put it out of its misery.

Once the dire thirst for foreign currency and funds sets it we strongly suspect that the government will be tempted to print. The new governor swears that will never happen under his watch. Will he be strong enough? Will he be able to resist the urge? He says he will be vigilant and never give in but only time will tell. Against all of history, we will give him the benefit of the doubt. We have our suspicious on how he will behave when the time comes but him giving in to the temptation is not really the reason why we think the black market will soldier on.

Rather it is the multi-currency setup and the way the Zimbabwean economy has evolved to structure itself. Allow us to explain:

• Most services are indexed in USD terms. Even internet and mobile service providers are pushing POTRAZ, their regulator, to allow them to do this. The truth is the strength of a currency is less important compared to the stability. People will prefer stability and ease of use any day. This is why the Rand will continue to be more coveted than the ZiG for example. As strong as the ZiG is now, people will prefer the USD or even the Rand as a store of value because both currencies are fairly stable and can be easily used to make purchases.
• The fact that the government could order the entire economy to switch to ZiG from another currency will also act against the ZiG. Those with USD are able to freely transact at the moment but thanks to the government’s directives those who had ZWL (now ZiG) are not yet able to transact. Some people cannot buy ZESA tokens, essential groceries or buy medication right now because they have the ZiG. Those people are likely to be more determined than ever to make sure that their savings, if any, and whatever they earn/have in their accounts is converted to the USD as soon as possible.
• In that event, the black market will be their first port of call. There are no onerous KYC terms here compared to the government which has ordered banks to demand an explanation of sorts from those who have $100 000 ZWL or more in their accounts. Rather than kill the black market such acts make people jittery and favour the parallel market where they can trade without being asked too many questions.
• Fuel, medicines and a lot of other services are sold exclusively in USD. This means those who earn ZiG will want to convert it to ZiG. The formal market has failed miserably to fulfil this need over the years. That’s not going to suddenly change because the government cleverly slashed zeroes from the ZWL and called it the ZiG with long-winded explanations about how it is backed with gold.
• These people will want to buy what they need. Those selling will demand USD. The informal sector in Zimbabwe dominates so much that 80%-90% of all transactions in this country are now in USD. The government has proved it has little control over this sector. They cannot even tax them.
• There is a general lack of trust in formal institutions If there’s a general distrust in official channels, like banks or currency exchanges, people might use the parallel market to avoid regulations or perceived corruption. The way banks have been allowed to bilk customers through expensive fees has made people want to avoid them. The government has not helped matters by levying an IMT tax of 2% on ZiG and 1% on USD transactions. People would rather pay this tax once rather than every time they transact.
• Regional Market Dynamics also play a role. Neighbouring countries like South Africa and Botswana have more stable currencies while also having more readily available cheaper goods, smuggling to and from Zimbabwe will continue to fuel the parallel market. South Africa is the major supplier of essential goods. Those who partake in this trade do so outside official chains. They rely on the black market for their source of currency because anything else will put them on the radar of the authorities.
• One of the biggest reasons why the black market thrives in Zimbabwe is limited access to formal markets. You cannot walk into your bank and ask for USD. The banks will cheerfully take away your USD but that is the last you will see it. How many of us ever managed to get forex from the famous Reserve Bank of Zimbabwe Auction before it closed? The official market for foreign currency is cumbersome, bureaucratic, or limited, people will turn to the parallel market for efficiency or to obtain goods unavailable officially.
• Another big reason we believe there will always be a black market for the foreseeable future is down to currency discrepancies. Throughout the lifespan of the ZWL, the government always promised they would let it float freely and be subjected to market forces. They never fully allowed this to happen. Instead, they would create marketplaces where the hand of the government weighed heavily on the exchange rate. The result was that the rate was always lower on the formal market. Statutory Instrument after Statutory Instrument was cooked up and hurled at the problem. Rather than admit fault the government blamed nameless saboteurs. They wanted to mint electronic ZWL and have the rate remain the same.

We could go on and mention a host of other reasons but these alone should be enough to ensure the survival of the foreign currency market-Zig or no ZiG. This is not to sell the parallel market is going to escape from this unscathed. Like in all times past when the government aggressively intervened to save the flailing ZWL, expect a lot of damage and lost profits. There is going to be an extended period of relative stability as the government desperately tries to deliver on the promise of gold-backed currency. During the intervening months expect lower profits and lower trade volumes compared to say March.

This is the best the government can hope for. A severely impaired foreign currency black market but sometime in the last quarter of this year, at the latest, the grain shortage will hit. It is then we will know what road the ZiG will take. Right now it’s all hot all talk. Like how the de-dollarisation failed, how the RBZ auction failed and how gold coins and tokens failed. We strongly suspect the ZiG will fail to kill the Zimbabwean foreign currency black market.