ZiG’s Rollercoaster: A Currency Devalued by Inflation and Forex Hunger

Over the course of the last week, the ZiG, Zimbabwe’s gold-backed currency, plunged into what many saw as a market-engineered freefall. The sharp decline was so obvious that even the most circumspect people in the financial world had a lot to say.

This is the kind of recession that adds fuel to the fire of doubt that many already have about the country’s currency’s future. One question stood out above the others as the Reserve Bank of Zimbabwe (RBZ) frantically attempted to manage the fallout: was this an unavoidable evil or could it have been prevented?

The people who were supposed to benefit from this money experiment—the citizens—reacted quickly. Building on the hope that the ZiG, supported by gold reserves, would bring about a new era of monetary stability, there had been cautious optimism for months.

But any sense of security was destroyed by last week’s abrupt devaluation, which went from ZiG14.1 per US dollar to ZiG24.3. The difference between the official rate and street-level exchange grew, and several sellers stopped doing business in ZiG entirely.

The outcome was a sharp increase in inflation that severely reduced Zimbabweans’ purchasing power and made them turn more and more to the US dollar, a well-known safety net.

The governor of the Reserve Bank of Zimbabwe, John Mushayavanhu, was quick to blame what he called “artificial pressures,” asserting that the devaluation was only a reaction to a transient mismatch between the supply and demand of foreign exchange.

He contends that the devaluation is an inaccurate indicator of the economy’s actual strength. However, despite these promises, the public’s anxiety has not decreased.

The average Zimbabwean is suspicious of Mushayavanhu’s promises of temporary shocks since they see the daily surge in costs for necessities. A lot of people are wondering if this was an attempt to cover up the real problems with the nation’s economic foundation.

Mushayavanhu’s reasoning mostly relies on the willing-seller, willing-buyer system’s drawbacks. Because there aren’t enough forex sellers, individuals who have foreign currency have the advantage.

As he puts it, this is a “buyers’ market.” Exporters and remittances from the diaspora are examples of foreign currency generators that can afford to avoid the ZiG and hold or transact in US dollars instead. This puts in jeopardy the fundamental foundation of the gold-backed ZiG.

However, disruption isn’t just being caused by a small number of foreign exchange dealers. Zimbabwe’s persistent economic problems are exacerbated by external causes such as the drought caused by El Niño and inflationary pressures.

Volatility is always a possibility in a market devoid of liquidity, and the introduction of a new currency—Nothing—not even one backed by precious metals—has essentially altered that.

It has turned out that the RBZ’s choice to let the ZiG float in response to market forces was a two-edged sword. On the one hand, it’s a practical strategy that lets the market determine the exchange rate.

On the other hand, it allows for unchecked volatility. Due to a restricted supply of foreign exchange and steadily rising inflation—1.4% in August 2024 and 5.8% in September 2024—the currency was headed toward instability.

Predictability was intended by the currency’s reliance on gold as its foundation, but even gold can’t completely shield a currency from shocks to the external economy or inflation.

Zimbabwe’s internal dynamics have eclipsed any possible gain, despite the fact that gold prices have been stable, reflecting a global upturn. Any potential strength that the price of gold might have had for the ZiG has effectively been eroded by inflation.

And then there is the RBZ’s 110 million US dollar stimulus to the economy. It helped to reduce the backlog of foreign exchange at local banks and ensure that vital goods kept coming in, which is why Mushayavanhu hailed it as a lifeline.

The problem is that, although stabilizing on the surface, this kind of intervention is like putting a bandage on a much bigger lesion. The need for the central bank to inject such a substantial amount of foreign exchange raises the possibility of a structural flaw in the currency as well as the continuous inability of the economy to produce forex on its own.

However, the larger ramifications are where the real action is. The ZiG can withstand relatively small economic shocks, so why can’t it withstand the strength of its gold holdings and other valuable assets?

As several opponents have noted, Zimbabwe’s more comprehensive economic policies hold the key to the solution. The central bank’s interventionist policies are overused, and although they are intended to safeguard the economy, they frequently lead to market distortions that fuel the very instability they are designed to avert.

It is evident that the ZiG’s gold-based backing cannot be the only solution to Zimbabwe’s currency problems. Although we’ve seen this past week, it’s a useful foundation, if not infallible.

In order to achieve genuine currency stabilization and rebuild public trust, the government must tackle the underlying problems, which include developing a highly competitive foreign exchange market, cultivating environments that draw and hold foreign capital, and managing inflation.

Although useful, the nation’s multi-currency system encourages people with foreign exchange to completely avoid using local currency, which is another factor contributing to these problems.

People have expressed their annoyance on social media and other platforms. A monetary policy that many believe is detached from the reality on the ground is the source of growing dissatisfaction.

Discussions concerning inflation differentials and gold reserves are alien to the average Zimbabwean. Their ability to purchase bread, fuel, and other necessities without having to witness daily price increases is what counts to them. And that feeling of financial stability isn’t there at the moment.

Zimbabwe requires a more comprehensive reworking of its economic policy rather than merely adjusting its currency. Instead of relying heavily on intervention, the emphasis should be on policies that boost output, improve export competitiveness, and promote foreign exchange inflows.

First and foremost, it is critical to maintain control over inflation. Even the strongest currency will collapse in the absence of such.

Essentially, although Mushayavanhu’s guarantees may appease the financial elite, they are meaningless for the vast majority of people, who are constantly affected by a declining value of their currency.

Rethinking the strategy is necessary for the RBZ and the government as a whole to restore stability to Zimbabwe’s currency market. Gold, for all its worth, is not able to sustain an economy’s whole monetary system.

Zimbabwe must commit to promoting economic growth, adopt greater fiscal restraint, and be transparent if it is to break free from the depressing patterns of the past.

Zimbabwe’s financial destiny, along with the ZiG, is at a crossroads. Whether this currency turns into a stabilizing force or just another chapter in the lengthy history of monetary upheaval in the nation will depend on the actions made right now.

More: The Zim Bulletin