Faith Nyasuguta
Zimbabwe has unveiled a novel strategy in its battle against re-dollarisation, as the government fears the return to widespread use of foreign currencies will be detrimental to its fragile economy.
The country’s central bank has introduced digital tokens known as Zimbabwe Gold (ZiG), which are denominated in milligrams and are available for use by both individuals and businesses in transactions.
ZiG tokens can be purchased from banks in the local currency as well as in US dollars. Moreover, goods and services will also be priced in ZiG. Bank customers can conduct transactions using ZiG accounts through point-of-sale machines or online payments.
This initiative comes after Zimbabwe introduced gold coins earlier in the year, intended for peer-to-peer and peer-to-business transactions, as well as a store of value amidst the steady depreciation of its currency against major foreign currencies.
However, this new approach has been met with mixed reactions, with many economists and ordinary citizens anticipating a return to dollarisation. Zimbabwe initially reintroduced its own currency in 2019, following a decade of dollarisation that followed a period of hyperinflation under the rule of Robert Mugabe.
The Zimbabwe dollar has been rapidly losing value against major currencies, with exchange rates indicating a grim situation. While the official exchange rate stands at ZWL$5,252 to $1, the parallel market rate is even more alarming, with $1 fetching ZWL$10,000.
During the height of the COVID-19 pandemic, the government introduced a multi-currency system to safeguard the local currency, but now, it’s estimated that 80 percent of transactions in the economy occur in US dollars.
Advisory firm IH Securities reported a weakening official exchange rate, which reached $1: ZWL$ 5,252,6558 in September, up from $1: ZWL$4,604,6233 the previous month. The parallel market experienced a similar increase of 12.90 percent during the same period.
In September, the US’ Famine Early Warning Systems reported a 20 percent increase in prices for some basic commodities compared to August, following 15 and 18 percent increases in the parallel and official market exchanges, respectively.
Economist Steve Hanke, a professor at Johns Hopkins University, argues that Zimbabwe “must dollarise as it did from 2009 to 2019.”
However, the Confederation of Zimbabwe Industries (CZI), representing most of the country’s major businesses, is urging the government to explore measures to prevent full dollarisation. CZI’s policy brief for September noted that foreign currency-denominated loans accounted for 94 percent of the banking sector’s loan book as of June 30, 2023.
The CZI emphasized the need for the government to determine the optimal level of Zimbabwean dollar liquidity to prevent the economy from defaulting to full dollarisation.
Robert Mubaiwa, head of Zimbabwe’s foreign currency-dominated Victoria Falls Stock Exchange, believes that the success of a digital currency depends on instilling confidence in the market and providing adequate infrastructure and education to users. He emphasizes the importance of safeguards and measures to inspire market confidence.
Gold serves as Zimbabwe’s largest export earner, with a production of 35.2 metric tonnes last year. The government aims to increase this to 40 metric tonnes this year, seeking to boost revenues from the mining sector and revive the struggling economy. However, watchdogs have raised concerns about the significant portion of the country’s gold being sold through unofficial channels.
A documentary produced by a Qatar-based international news network shed light on individuals linked to Zimbabwe’s political elite smuggling gold to refineries in Dubai. Some of these smugglers claimed to have direct access to President Emmerson Mnangagwa and his family.
Zimbabwe’s central bank has denied any involvement with these smugglers, who alleged that they used the bank’s gold buying schemes for money laundering purposes.
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