Cafe Emmanuel

FOREIGN CURRENCY RESERVES backing Zimbabwe Gold (ZiG) have increased to more than $500 million, approximately three times the total ZiG in circulation, a development that is expected to improve monetary and price stability.

The ZiG coin has performed strongly in recent weeks since the September devaluation, appreciating from $1:ZiG 27.4 in late October to $1:ZiG 25.6 on Friday.

The appreciation indicates a reduction in pressure on the formal exchange market and is expected to increase consumer purchasing power.

As of last week, the Reserve Bank of Zimbabwe (RBZ) had foreign exchange reserves worth US$509 million, surpassing total bank deposits in domestic currency, which are around ZiG12 billion.

The strengthening of the local unit reflects the effects of the RBZ’s recent monetary policy interventions aimed at curbing exchange rate volatility and inflationary pressures.

RBZ Governor Dr John Mushayavanhu told the Sunday Mail that ZiG’s strengthening was partly due to recent policy initiatives, including the increase in the banking policy rate from 20 per cent to 35 per cent.

Additionally, reserve requirements for demand and demand deposits, both in local and foreign currency, were standardized at 30 percent, while savings and time deposits were set at 15 percent.

“The combined effect of these measures has significantly reduced ZiG’s liquidity in the market,” Dr Mushayavanhu said.

“The exchange rate has also strengthened, benefiting from increased foreign exchange earnings.”

The country’s foreign exchange earnings rose 18 percent during the nine months to September compared with the same period last year.

“Therefore, the ZiG:US dollar exchange rate has been appreciating under the willing buyer, willing seller arrangement, in line with market fundamentals, reflecting the foreign currency supply and demand dynamics in the interbank market,” he added.

“ZiG’s tight liquidity conditions amid a tight monetary policy stance in the market have seen an increased willingness on the part of economic agents to liquidate their foreign currency positions, thereby creating demand for ZiG.

“These conditions have greatly contributed to the appreciation of the currency.

“Currently, the total reserve money in local currency as of November 6, 2024 is approximately 3.4 billion ZiG, which is equivalent to about 129 million dollars, against foreign exchange reserves of 509 million dollars.”

This, he said, implies a coverage of more than three times the reserve money in local currency.

“The Reserve Bank’s total foreign currency reserve holdings of over $500 million as of November 1, 2024 are also higher than total domestic currency bank deposits of approximately ZiG 12 billion, giving a implicit exchange rate of around $1:ZiG24.

“Therefore, since April 5, 2024, the Reserve Bank has consistently maintained more than sufficient reserves to support the ZiG currency and ensure its stability.”

He said the Reserve Bank will continue to regularly intervene in the market using 50 per cent of the 25 per cent export delivery requirements.

This intervention, he added, will support smooth operations in the foreign exchange market, meet the demand for legitimate external payments and strategically strengthen reserve holdings to sustain ZiG stability.

“The Reserve Bank will continue to make strategic foreign exchange interventions to ensure that there is smooth settlement of foreign payments in the interbank foreign exchange market,” Dr Mushayavanhu said.

“The full backing of reserve money in local currency ensures that at all times the Reserve Bank has adequate foreign currency reserves to intervene in the market and ensure the stability of the local currency. Currently, Reserve Bank reserves have exceeded $500 million, which is more than three times the coverage of reserve money.”