daniel chigunwe
Note from ZNCC
Since the late 1990s (the “Black Friday”), Zimbabwe’s currency landscape has been tumultuous, marked by hyperinflation, shifting monetary frameworks and persistent dependence on foreign currencies.
In 2024, the Reserve Bank of Zimbabwe (RBZ) introduced Zimbabwe Gold (ZiG), a currency backed by reserves in foreign currency, gold and other precious minerals, aiming to stabilise the economy.
ZiG was presented as a solution to the country’s chronic currency volatility, but seven months on, market reactions and policy evaluations reveal a mix of optimism and scepticism about its future viability.
ZiG’s was launched aimed at reducing Zimbabwe’s heavy reliance on the US dollar. However, industry experts argue that the underlying structural issues that contributed to the collapse of the Zimbabwe dollar (ZWL) remain unresolved.
Critics point to ZiG’s detachment from international gold prices, which undermines the perceived value of its gold backing.
Despite rising global gold prices, ZiG did not gain in value on the interbank market as anticipated, eroding public confidence in the currency and creating the perception that ZiG is merely a rebranding effort rather than a meaningful economic reform. This is against the policymakers’ assurances that “this time is different”.
For any currency to gain traction in a dollarised economy, it must provide stability. Economists argue that Zimbabwe’s current structure does not foster a balanced economic environment and a stable local currency framework.
Instead, it faces criticism as a fixed exchange rate model, vulnerable to reserve depletion and lacking the ability to inspire confidence in Zimbabwe’s financial landscape.
ZiG’s failure to reflect the value of its gold reserves in the interbank and parallel markets raises concerns of potential inconsistencies, with the September 27 devaluation highlighting these issues.
Historical examples of currency collapse illustrate the need for robust policy frameworks over short-term currency solutions.
The Weimar Republic, Argentina and Zimbabwe’s own hyperinflation in 2008 all underscore the importance of fiscal discipline and structural reforms.
Analysts caution that, without strengthening policies around fiscal stability, industrial productivity and reserve management, ZiG risks becoming the latest iteration in Zimbabwe’s history of currency instability.
Zimbabwe’s reserve position also remains a significant challenge. As of October 2024, Zimbabwe’s total reserves, including gold, amounted to approximately U$450 million, insufficient to cover even a month’s imports and considerably lower than the reserves of major economies like China (US$3,45 trillion), the Russian Federation (597,22 billion), and South Africa (US$62,49 billion) as of December 2023.
To support ZiG in the long term, Zimbabwe will need to bolster its foreign currency reserves significantly.
However, the argument against reserve accumulation, especially in a country struggling with a lack of adequate resources to finance the Government’s developmental efforts, pertains to the foregone opportunity to utilise such reserves.
Critically, the long-term benefits of accumulating reserves are far higher than the short-term gains that could be realised, particularly in countries struggling with prolonged currency instability.
At present, the RBZ relies heavily on export surrender requirements as a key foreign currency source, with the central bank serving as the primary supplier on the interbank market.
This reliance, coupled with the tiny amounts of reserves, limits Zimbabwe’s ability to defend the ZiG against speculative attacks or to meet currency demands sustainably. Consequently, building foreign reserves is crucial to ensure ZiG’s stability.
Since its launch, responses to ZiG from stakeholders have varied. The Zimbabwe National Chamber of Commerce (ZNCC) has reported widespread scepticism from the business community, which questioned and continues to question ZiG’s sustainability.
In a ZNCC survey conducted before the 2024 Annual Congress in June, businesses expressed doubt about ZiG’s success unless it can be used to pay for essential transactions, such as fuel purchases and import payments.
Commentators such as Daniel Silke, argue that ZiG is a temporary fix rather than a long-term solution, likening it to a “plaster over a wound.”
Risk analyst, Marisa Lourenço, suggests that ZiG’s success depends on building public confidence through consistent and transparent policies.
Meanwhile, the International Monetary Fund (IMF) has acknowledged ZiG as an innovative step but cautions that Zimbabwe needs comprehensive reforms to support it, particularly in areas like inflation control, fiscal discipline and debt management.
To instil stability in ZiG, experts emphasise the need for transparent and consistent monetary policies.
Effective currency reform should align with inflation targeting and macroprudential measures to reduce reliance on foreign currency, strengthening public trust in ZiG.
De-dollarisation is no easy feat. Additionally, Zimbabwe needs to accumulate more foreign reserves by enhancing exports in high-potential sectors such as agriculture and mining while curtailing wasteful spending.
The key lies in the country’s ability and drive to diversify the export basket. With an estimated 64 percent of Zimbabwe’s economy in the informal sector, policy measures aimed at formalising this sector would expand the tax base, stabilise the currency and increase Government revenue, aiding ZiG’s adoption.
Consistency in the RBZ’s policy commitments is essential for building public trust. Adhering to the principle of time consistency — where actions align with stated policies — can foster credibility.
Inflation targeting, coupled with measures that increase the cost of dollar-denominated loans, is vital to Zimbabwe’s de-dollarisation efforts.
Clear and transparent communication of policies and economic conditions will also help build public trust, reducing dependence on foreign currencies.
As preparations begin for the 2024/25 agricultural season, the demand for foreign currency among ZWG holders is expected to intensify, particularly as most agricultural inputs are sold in foreign currency.
The disparity between the official and parallel markets underscores the challenges ZiG faces in achieving wide acceptance and stability.
In addition, recent announcements regarding an expedited de-dollarisation strategy have heightened concerns and uncertainty. Memories of policy changes from 2021 (promulgation of the mono-currency regime) prompt households and businesses to offload ZWG at the parallel market rate.
Despite the RBZ’s assurances, small-scale offloading of ZWG contributes to significant parallel market activity, impacting broader market stability.
Even with the requirement for corporates to pay at least 50 percent of their tax obligations in ZWG by September 25th, exchange rate stability has remained elusive.
The Ministry of Finance, Economic Development and Investment Promotion projects ZWG 93,2 billion in revenue for 2024, with an estimated ZWG 30 billion expected in local currency payments in the latter half of the year.
However, analysts argue that this will be insufficient to drive demand for ZWG, as factors such as debt servicing pressures, preference for the US dollar and increased Government expenditure erode its impact.
Macroeconomic instability and currency volatility have driven businesses toward informality. Exchange rate premiums between the official and parallel markets have led many businesses to limit formal supermarket supplies, diverting output to informal markets where transactions are conducted in US dollars.
Given these dynamics, experts caution against requiring all sectors to adopt ZiG. Sectors with significant USD overheads, like fuel and energy, would face liquidity risks if mandated to transact in ZWG, potentially leading to shortages, price hikes, and inflationary pressures.
As Zimbabwe navigates the complexities of its currency reforms, the success of ZiG will depend on whether it can address the root causes of past currency instability.
Building public confidence through transparent, consistent and disciplined economic policies will be essential to achieve sustained stability and currency resilience in the years to come.
This article was prepared by the ZNCC for Business Weekly
Bongani Ndlovu