The introduction of Zimbabwe’s new ZiG currency is expected to have a significant impact on formal markets, believes Hamond Motsi, a PhD student at the faculty of agrisciences, Stellenbosch University. This, while its effect on informal markets may be more limited.
Every country has a past that includes dark corners, whether it be economically, politically, or socially. Zimbabwe, however, has experienced a unique horror in its history, in the past two decades of super hyperinflation of its currency.
Until today, Zimbabwe holds the medal of having the largest inflation hike in world history, particularly in the twenty-first century which sometime in November 2008 exploded to 79.6 billion percent on month-on-month inflation.
This has plagued the country’s overall economy alongside factors such as poor monetary policies, maladministration, poor governance, the collapse of the industrial sector, sanctions, political instability, and the uncontrollable parallel market (normally known as the black market).
Introducing the ZiG
Considering such extremes of hyperinflation, the country has taken both central and peripheral measures to mitigate it, often implementing a new currency system in response to uncontrollable inflation rates and there has been a plethora of different currencies introduced in Zimbabwe over the past two decades.
The latest currency is the ZiG transcribed from the Zimbabwe Gold, which its introduction has sparked mixed reactions both locally and internationally. The currency was introduced in early April this year being backed by the 2.5 tons of gold reserves and US$100 million in foreign currency reserves in the Reserve Bank of Zimbabwe (the country’s central bank). Altogether, this makes a total value of US$ 285 million to back the ZiG currency three times, as mentioned by the central bank governor.
The anticipated introduction of the ZiG currency is expected to have an impact on various sectors, including agriculture, due to its significant contribution to the nation’s economy.
What does it mean for formal markets?
It is crucial to comprehend the agriculture marketing dynamics in the country’s agricultural sector, particularly the local market, and explore how the new currency might influence it. The agriculture markets are commonly classified as formal and informal markets, and the effects of the new currency may vary for each market.
Formal markets typically concentrate on cash crops, which are marketed through government institutions, resulting in payments being made by the government and the government having control over the marketing dynamics.
For significant agricultural products, such as grain, cotton, and tobacco, specific government bodies oversee their marketing. For instance, The Grain Marketing Board (GMB) is responsible for managing all grain crops, while the Cotton Company of Zimbabwe (Cottco) manages cotton, and the Tobacco Industry and Marketing Board (TIMB) manages tobacco.
However, tobacco sales take place at private company-owned auction floors but in these markets, payments are made partially in Zimbabwean dollars and partially in US dollars.
What about informal market?
On the other hand, the informal markets typically involve the trading of fruits and vegetables, and the government generally has limited to no intervention in these markets. In such markets, farmers transport their commodities to local town or city agricultural markets, where the prices are determined by the principles of demand and supply.
Some notable agricultural markets in Zimbabwe include Mbare Musika in Harare, Sakubva Musika in Mutare, and Chipadze Musika in Bindura. These markets function as distribution centers, where vendors purchase goods in bulk and then resell them in their respective areas.
The payment system in the informal market is based on US dollars in cash rather than the Zimbabwean dollar. Also, in these informal markets, certain fruits such as apples, peaches, and grapes are imported from South Africa and purchased in US dollars.
Moreover, some farmers participating in formal markets opt for the informal market, especially for grains, due to the lower value of the Zimbabwean dollar offered that side and the delayed payments by the government. Consequently, they choose to participate in the informal market, which exclusively uses US dollars as a means of payment.
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Challenges for small-scale farmers
Considering the nature of these two marketing systems, it is likely to suggest that the new ZiG currency will have a significant impact on the formal market, while having a more limited effect on the informal markets. This is because in the informal sector, the payment system is strictly based on US dollars, as people prefer not to trade with the Zimbabwean dollar, which is highly volatile and subject to inflation.
Additionally, the market in the informal sector is highly sensitive, with prices determined by the laws of supply and demand. The general public has a mistrust of local currencies, due to their volatility and susceptibility to inflation when compared to the US dollar. Unverified reports circulating on social media suggest that the ZiG currency has already experienced a 33% inflation increase, just two weeks after its introduction, which further underscores why the informal market may shun its use.
The formal sector of the economy is impacted by the government’s payment system. It is likely that the ZiG currency will experience inflation in the near future, which will disproportionately affect farmers participating in formal markets.
In Zimbabwe, most goods and services are priced in US dollars, except for some government services. As a result, purchasing goods and services using the local currency devalues the purchasing power of farmers, as the local currency weakens over time.
This challenge is further exacerbated when farmers attempt to purchase inputs from agro dealers who price their products in inflated US dollars. Additionally, small-scale farmers who participate in these formal markets may face greater hardship than commercial farmers, as the small-scale have limited access to credit and inputs.
Historical currency challenges
Nevertheless, the current El Niño-induced drought has led to a season characterised by poor and varied rainfall events, resulting in projections of low agricultural output, particularly for staple grains.
Therefore, the government has already declared a state of disaster which will sprinkle high demand for grain crops, there is expected to be a significant increase in prices. Consequently, many farmers are likely to divert their produce to the informal market, where they can quickly bargain prices in US dollars rather than the formal market where they will confront the ZiG.
The new Zimbabwe ZiG currency is inevitably expected to have an impact on the country’s agriculture sector, particularly the formal sector rather than the informal sector.
The country has experienced a multitude of currency types over the past two decades, which have not effectively resolved the real economic challenges it faces.
Sectors such as agriculture, which is the country’s primary source of livelihood and a major contributor to the Gross Domestic Product (15-18%), are particularly vulnerable to these economic fluctuations. Robust measures must be put in place to address the monetary system and create a stable environment that will facilitate economic growth, particularly in the agricultural sector.
- Hamond Motsi is a PhD student at the faculty of agrisciences, Stellenbosch University (SU) interested in sustainable agriculture and agricultural development in Africa. He holds an MSc in agronomy (cum laude) from SU, a BSc Hons in crop science, and BSc in crop and soil science (cum laude), both from the University of Fort Hare. You can contact him at onehammond2@gmail.com.
- The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Food For Mzansi.
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