Department of Research, Strategic Studies and International Relations 30-10-2024

Six months after introducing its gold-backed currency, Zimbabwe finds itself grappling with a severe depreciation, signaling ongoing challenges in its bid to stabilize the economy. The Zimbabwe Gold (ZiG), launched as a potential solution to the nation’s long-standing currency crisis, has seen its value halved since its introduction, raising concerns about the viability of Zimbabwe’s local currency and its continued dependence on the U.S. dollar.

In April, Zimbabwe’s central bank introduced the ZiG as a potential antidote to the economic instability that has plagued the country for years. However, by late September, the value of the currency was slashed by more than 40%, reflecting a lack of market confidence in the new system. The government had hoped this gold-backed currency would resolve the economic turmoil exacerbated by hyperinflation, but so far, the results have been disappointing.

 The Currency Crisis and Persistent Inflation

Zimbabwe’s struggle with inflation has deep roots, going back to 2009 when hyperinflation caused the collapse of the Zimbabwe dollar (Zimdollar). Following this, several attempts to stabilize the economy by introducing new currencies have failed, with the most recent attempt—ZiG—facing similar challenges.

Hyperinflation was initially triggered by economic mismanagement and excessive money printing under former President Robert Mugabe. At its peak, inflation reached staggering levels, wiping out savings and pensions and making basic necessities like bread nearly impossible to afford. To cope, Zimbabwe adopted the U.S. dollar in 2009, and although there have been efforts to reintroduce local currencies, the population remains deeply skeptical of them.

In May 2023, Zimbabwe also introduced a digital gold-backed currency to little enthusiasm from the business community, which largely still favors the U.S. dollar.

 Devaluation of the ZiG: What Happened?

On September 27, the Reserve Bank of Zimbabwe (RBZ) devalued the ZiG by 43%, dropping its value from 13.56 ZiG to the U.S. dollar to 24.4 ZiG. This devaluation came as unofficial market exchange rates had already started drifting far from the official rate. While the government hoped the move would align the currency with market realities, the gap between official and black-market rates persisted. By late October, the ZiG was trading at 40 to 50 ZiG per U.S. dollar on the black market, according to Zim Price Check, a monitoring website.

Businesses trading in the ZiG warned the government they would be forced to shut down if these discrepancies were not addressed. In response to the devaluation, RBZ Governor John Mushayavanhu insisted that it wasn’t a true devaluation but rather a reflection of market realities. He added that further devaluation was not expected, though he did predict a slight uptick in inflation by year’s end.

 The Introduction of ZiG: Rationale and Skepticism

The ZiG was officially launched on April 5, replacing the Zimdollar, in an attempt to curb rampant inflation. The Zimdollar, which was eventually abandoned, had been one of the worst-performing currencies in the world, losing nearly all its value due to hyperinflation. By the time it was phased out, the exchange rate was a staggering 30,000 to 40,000 Zimdollars per U.S. dollar. Businesses and consumers had already largely rejected the local currency, preferring the stability of the U.S. dollar.

Despite the introduction of the ZiG, Zimbabwean authorities have struggled to reduce reliance on foreign currency. By the time the ZiG was launched, approximately 85% of the country’s transactions were still being conducted in U.S. dollars.

The ZiG is backed by a combination of gold, diamonds, and other precious resources from Zimbabwe’s reserves. According to the RBZ, the country holds 1.1 tonnes of gold worth approximately $175 million and foreign currency reserves of about $100 million. However, these numbers have not been enough to inspire confidence among the population.

 Mixed Reception and Continued Uncertainty

The reception to the ZiG has been mixed, with some arguing that it’s too early to judge the currency’s performance. The ZiG is issued in eight denominations, including coins, with the highest denomination being the 200 ZiG note. Despite the government’s assurances, many Zimbabweans remain wary. “The ZiG is losing value too quickly, and it doesn’t make sense for us to use it,” said Maynard Maketo, a street vendor in Harare, reflecting a sentiment shared by many.

Still, there have been some signs of acceptance. Zimbabwean media reported that the use of U.S. dollars for transactions had dropped from 85% to 70% since the ZiG’s introduction. Yet, despite these figures, many people continue to trade their ZiG for U.S. dollars on the black market, further destabilizing the local currency. Some businesses have outright refused to accept the ZiG, and confidence in the new currency remains shaky.

 The Road Ahead for the ZiG

The future of the ZiG remains uncertain. Although government entities have been instructed to pay salaries and pensions in both ZiG and U.S. dollars, confidence in the currency is low. In September, the Grain Marketing Board paid wheat farmers entirely in U.S. dollars, and civil servants are also expected to receive raises and bonuses in U.S. currency.

Experts have cautioned the government against phasing out the multicurrency system too quickly, suggesting that Zimbabwe take a gradual approach to stabilize the local currency. While some have said that devaluing the ZiG was a necessary move to reflect market realities, the government’s next challenge is to ensure the currency is widely accepted. For this to happen, Zimbabwe needs to encourage its use in transactions, such as charging more taxes in ZiG, and create stability over the long term.

Lawrence Nyazema, president of the Bankers Association of Zimbabwe, expressed cautious optimism, saying, “We’re not seeing the end of the ZiG, but there’s a lot of work to do in terms of building trust. Now that the currency has been adjusted, we need to focus on keeping our promises to ensure that it stabilizes.”

The coming months will be critical for Zimbabwe’s monetary system as the government seeks to convince a skeptical population that the ZiG can provide the stability that the economy so desperately needs.