The stock market plummeted 99.99% in a single day, and Zimbabwe demanded that the United States lift sanctions

Observer.com

2024-04-24 10:38Posted on the official account of Shanghai Observer.com

The Zimbabwe Stock Exchange's all-stock index has seen a rare plunge since the Zimbabwe Central Bank launched ZiG (short for Zimbabwe's new currency, Zimbabwe's gold) on April 5, 2024.

Since the beginning of this year, Zimbabwe's original currency, the Zimbabwean dollar, has depreciated by more than 80%, becoming the second worst country in the world in terms of exchange rate performance.

In response, Zimbabwe's new central bank governor, John Musayawanhu, embarked on a currency reform after taking office on March 28 and launched Zimbabwe Gold on April 5, aiming to restore the credibility of the institution, known for printing 100 trillion banknotes and 200% interest rates.

However, the introduction of the new currency directly destroyed Zimbabwe's capital market, and the Zimbabwe all-share index closed at 96.33 points on April 23. The Zimbabwean stock market rose more than 330% from the beginning of the year until the new currency was issued, reaching an all-time high on April 5, followed by a plunge from 915,936.81 to 100.23 on April 8, a one-day decline of more than 99.99%, and a year-to-date decline of 99.95%.

The stock market plunged as Zimbabwe's finance minister, Mthuli Ncube, publicly demanded that Bank of America lift sanctions on Zimbabwe in Washington, USA.

Malala, a South African political commentator, said that Zimbabwe's currency reform will not solve any of the problems the country is currently facing, and Zimbabwe needs a political reform.

Sixth monetary reform in 16 years

Before it became famous with the printing of 100 trillion banknotes, Zimbabwe's national currency was in collapse.

Zimbabwe has undergone five currency reforms since 2008, and according to the International Monetary Fund, inflation in Zimbabwe has reached 500 million since 2008. At the beginning of the year and early April, the country's currency depreciated by more than 80%, and inflation rose from 47.6% in February to 55.3% in March.

A week later, on March 28, Zimbabwe appointed former Standard Chartered banker John Musayawanhu as central bank governor, and a week later issued a monetary policy statement on April 5, saying it would begin the country's sixth monetary policy reform by replacing the Zimbabwean dollar with a new currency called the Zimbabwean gold.

Zimbabwe's central bank said the new currency was backed by a basket of foreign currencies and gold, and in a document explaining the support, Zimbabwe said the country's current reserves included $100 million in cash and 2,522 kilograms of gold. "The total amount of gold and cash reserves held at $285 million, which is more than three times the coverage of the ZiG currency being issued," said John Musayawanhu. ”

The value of ZiG is not only backed by a basket of foreign currencies and gold. According to official sources, the new currency will be circulating in the economy from April 30, and the central bank will continue to carry out promotional activities to raise awareness of the new currency. "To stimulate demand for ZiG, Zimbabwe will make it mandatory for businesses to pay at least half of their taxes in the new currency," the central bank said. ”

The local government showed full confidence after the launch of the new currency, saying: "The currency change is expected to reduce the annual inflation rate to 2% to 5% by the end of the year and the monthly inflation rate to below 1%. ”

The stock market crashed overnight

In the face of poor inflation, Zimbabwe's stock market, as one of the few investment targets in China and even in southern African countries, has been used by many local people as a hedge against exchange rates and inflation, and the country's stock market rose by 330% in the first quarter before the launch of the new currency.

However, after announcing the new monetary policy after the close of local time on April 5, investors found out on April 8 that they had lost 99.99% of their wealth in the stock market by surprise.

According to data from the Zimbabwe Exchange, the trading volume of the Zimbabwean stock market reached $2387549 two weeks before the currency reform, and two weeks after the opening of the market on April 8, the turnover shrank directly to $221995, and the trading volume also fell from 15.251 million shares to 1.877 million shares.

Regarding the stock market plunge and extremely contractive liquidity, the exchange's chief executive, Justin Bugoni, said on April 8 that a number of factors contributed to the exchange's poor performance, including the long time it took for the country's banks to complete the conversion from the Zimbabwean dollar to ZiG, and tight market liquidity. "In general, people are also hesitant to understand what the value of ZiG is," he said. ”

Lloyd Mloshwa, head of research at Harare Brokerage, said the drop in trading volume had led to a drop in revenue of at least 50 per cent for some brokerages, with most of them taking a huge hit to their earnings. For stockbrokers, he said, the new currency has had a domino effect, resulting in lower average daily volumes, which in turn has a knock-on effect on the stockbroking industry.

Shelton Sibanda, Chief Investment Officer at the Executive Office of the Chief Imara Chief, wrote in a client note: "It is more sensible for the Zimbabwe Stock Exchange to convert the currency of trading to US dollars, especially now that many underlying listed companies report in US dollars and pay US dollar dividends," Shelton Sibanda, chief investment officer at the Executive Office of Imara Chief.

Not only has there been huge volatility in the stock market, but there have also been problems in the retail market. According to foreign media reports, locals prefer to believe in a stable dollar. While companies will be forced to use ZiG to trade and pay taxes at the official exchange rate set by the central bank, the market is sticking to a more stable US dollar. This means that the retailer will sell the item in US dollars, which is usually much more expensive than the same item sold on the street. The new monetary policy does not seem to have affected informal traders, who are making more profits by trading in the US dollar.

Denford Mutashu, president of the Zimbabwe Retailers' Federation, said, "The new policy has created a significant disadvantage for compliant businesses struggling with taxes, licensing, labour costs and rents. The IMF warns that this could "fuel informality, which erodes the tax base and hurts long-term growth."

"Assuming the currency remains stable, retailers run the risk of 'exiting the market' if they raise prices too much," said John Musayawanhu. ”

It is understood that in order to support the new currency and stimulate growth, which is limited by high borrowing costs, the central bank reset the interest rate from a world record of 130% to 20%. So far, ZiG has made a good start – after more than a week of trading, its exchange rate has risen more than 1% against the US dollar.

The Minister of Finance urgently called for help

Faced with the risk of failing again in its domestic currency reform, Zimbabwe turned to the United States for help.

On April 19, Zimbabwe's Minister of Finance, Mssouli Ncube, led a delegation to Washington, D.C., where he met with officials from the U.S. Treasury Department to discuss the easing of financial sanctions on Zimbabwe.

The United States has imposed sanctions on Zimbabwe since 2002, mainly through three main ways: personal sanctions, financial sanctions and trade sanctions. Although the United States claims that the sanctions against Zimbabwe are targeted sanctions, their effect is no different from that of comprehensive sanctions.

In the area of financial sanctions, the United States has not only frozen the assets of Zimbabwean sanctions targets in the United States, but also cut off Zimbabwe's business with international financial institutions on the grounds of terrorism and money laundering, and restricted Zimbabwean financial institutions from conducting international business.

According to the statistics of the Reserve Bank of Zimbabwe, under the sanctions in the past 20 years, Zimbabwe has been affected by sanctions, and more than 100 financial institutions have terminated their correspondent banking relationships with Zimbabwe, which makes it difficult for Zimbabwe to achieve direct liquidation with U.S. financial institutions, thereby boosting the credibility of the local currency.

In March, the U.S. updated its sanctions program and said U.S. entities may revisit Zimbabwe's position on Zimbabwe, even though they still imposed sanctions on Zimbabwean President Emmerson Mnangagwa and other senior officials.

In response, at an online briefing in Washington on April 19, Zimbabwe's finance minister told reporters: "We ask the U.S. Treasury Department to issue an advisory note to Bank of America indicating that they have lifted sanctions and Zimbabwe has started operations." ”

Zimbabwe's Minister of Finance and Economic Development, George Guvamatanga, said in a briefing that Zimbabwe's own banks have adequate mechanisms to combat money laundering and terrorist financing, and that the country's removal from the grey list two years ago is proof that the country's banks have adequate controls.

In addition to the vote of no confidence in the new currency in the Zimbabwean stock market, some political commentators have expressed doubts about the prospects of the new currency.

"Zimbabwe's currency reform will be a failure, like all monetary reforms in the past 16 years, and Zimbabwe needs a radical political reform, not a change of currency," said Malala, a South African political commentator

"It's still early days, but the future of the new currency is already clear," he said. While the ZiG was stronger than the South African rand when it debuted (the South African rand is as widely used in the country as the US dollar), the ZiG cannot buy fuel in Zimbabwe. ”

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