Faith Nyasuguta
Just five months after Zimbabwe introduced its new currency, the Zimbabwe Gold (ZiG), the country is facing troubling signs of currency instability. Initially launched to address inflation and reduce dependence on the US dollar, the ZiG now shows worrying signs of devaluation.
The ZiG, backed by 2.5 tonnes of gold and foreign currency reserves, was meant to stabilize Zimbabwe’s economy, which had been plagued by currency crises for over two decades. Despite early promises, including a stable exchange rate of $1 to ZiG14.5 and initial control over inflation, recent developments are casting doubt on its future.
In April, the ZiG was introduced to replace the depreciating Zimbabwe dollar (ZWL), which had lost over 80% of its value since its reintroduction in 2019. The government of President Emmerson Mnangagwa rolled out stringent measures to support the new currency, including crackdowns on street traders accused of exacerbating the parallel foreign currency market. However, these measures have not fully addressed the underlying issues.
While the official exchange rate remains relatively stable at $1 to ZiG14.5, the black market rate has surged to ZiG24 to $1, indicating significant depreciation. Economists and market analysts are alarmed by this sharp decline, which happened primarily in the past month.
Eddie Cross, an advisor to President Mnangagwa, warns that without immediate intervention, the ZiG could follow the same troubled path as its predecessors. He points out that despite initial claims of robust gold and foreign reserves backing the ZiG, its value on the parallel market has deteriorated significantly.
The Reserve Bank of Zimbabwe (RBZ) has faced challenges managing the currency’s value. The government’s efforts to force businesses to trade at the official rate of 14.5 to $1 have been largely ineffective. The informal sector, which constitutes a significant part of the economy, continues to trade at much higher rates, exacerbating the currency’s instability.
A case in point is Hippo Valley, Zimbabwe’s largest sugar producer. The company has reported a mismatch between revenues in ZiG and expenditures in US dollars, with service providers preferring payments in foreign currency. This disparity emphasizes the broader issue of the ZiG’s limited acceptance and utility in the market.
The Confederation of Zimbabwe Industries (CZI) also highlights the widening gap between the official and parallel market rates. The CZI warns that the currency’s depreciation is imposing inflationary pressures and disrupting business operations. The excessive demand for foreign currency and the difficulty in accessing it on the official market are major concerns.
Adding to the strain, Zimbabwe’s economic pressures are exacerbated by the need to import grain due to an El Nino-induced drought. This situation, coupled with significant government spending on infrastructure for a regional summit in Harare, further strains the ZiG.
President Mnangagwa’s government is considering ending the multicurrency system and making the ZiG the sole legal tender by 2030. This move would mark a return to a single-currency system, abandoning the mixed currency approach adopted in 2009 following hyperinflation that saw Zimbabwe abandon its local currency for a basket of foreign currencies.
Economists are skeptical about Zimbabwe’s ability to reverse dollarization, noting that only a few countries have successfully moved away from using the US dollar after adopting it. The International Monetary Fund (IMF) cites Poland, Israel, Mexico, and Pakistan as rare exceptions among 85 countries surveyed from 1980 to 2001.
The current situation in Zimbabwe is dire. The ZiG’s volatility is crippling both formal businesses and the poor, with a resurgence of the parallel market threatening economic stability. Without substantial reforms, Zimbabwe’s new currency could face the same fate as its predecessors, leaving the nation grappling with yet another failed attempt at currency stabilization.
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