Zimbabwe’s ZiG Currency: Backed by Gold but Free to Fluctuate

Regarding the Zimbabwe Gold (ZiG) currency and its link to precious metal, one of the most important questions has been clarified once more by Zimbabwe’s Finance Minister, Mthuli Ncube. After President Mnangagwa’s State of the Nation Address, Ncube spoke to allay fears by clarifying that, although ZiG is backed by gold reserves, its exchange rate is not tied to the price of gold on the market.

Even if the price of gold has been steadily rising worldwide, this has prompted new discussions, particularly in light of the recent 42.55% devaluation of ZiG versus the US dollar.

Many people in Zimbabwe have had difficulty understanding the seeming contradiction. Given that gold prices are rising and that gold is thought to stabilise currency markets, why would a currency backed by gold drop so drastically? According to Ncube, the distinction is based on the distinction between fixing and backing.

He underlined that although a currency backed by gold depends on the reserves stored in gold, its exchange rate is still subject to change based on supply and demand in the market.

The difference is little yet important. Fixed currencies are similar to the historical gold standard, which was abandoned by most nations in favour of more flexible, floating systems, as they lock the exchange rate directly to gold. Zimbabwe’s strategy, however, allows it flexibility in a market full of volatility and outside influences, mirroring the global move away from gold as a strict anchor.

The minister brought up the fact that the Reserve Bank of Zimbabwe has gold reserves worth roughly US$370 million, which it utilises to support the ZiG and intervene in the currency markets as needed. Ncube contends that this adaptability is essential to meeting the demands of the economy, particularly in terms of supplying US dollars for vital imports. But the ground reality presents a more nuanced picture.

Even if Zimbabwe’s gold reserves support the local currency, they do not ensure stability in the face of the country’s wider economic difficulties. The nation’s financial environment is challenging, with issues ranging from uncontrollably high inflation to a thriving black market for foreign exchange. Additionally, Ncube announced steps to stop the illegal market’s resurgence, but he remained silent on specific measures or deadlines, casting doubt on the currency’s viability.

It is crucial to recognise that a currency is not immune to market forces just because it is backed by gold. There is more to Zimbabwe’s economic problems than just volatile currency. The public’s ingrained mistrust, devaluation, and hyperinflation have all plagued the local currency for many years. Although gold reserves offer a safety net for finances, the absence of a fixed exchange rate invites speculation and instability.

Furthermore, Ncube’s comments regarding pay increases, specifically for public employees, emphasise the complexity of the issue. There’s growing pressure on the government to deal with the devaluation of currency, which reduces purchasing power. Although the timetable is still unclear, this problem is intended to be resolved through negotiations within the Tripartite Negotiating Forum. Ncube’s pledges to modify civil worker salaries before to the year’s conclusion demonstrate the government’s recognition that actual earnings have been significantly compromised. According to him, the devaluation of a currency can have both positive and negative consequences on the earnings of workers. In the business sector, maintaining jobs in formal industries is still a key priority.

However, the larger picture painted by these changes shows a nation struggling to manage wages, inflation, and a currency that is far from stable despite its support. In contrast to a fixed system where gold provides a stable base, the ZiG functions in an environment where market volatility is paramount. The unpredictable nature of Zimbabwe’s economy makes long-term planning difficult for both companies and employees.

Zimbabweans have to negotiate their daily lives in this unpredictable climate, continually reevaluating the value of their assets and income. Wage rises could provide some respite, but they could not last long enough if the nation’s financial system isn’t fundamentally restructured. The question of whether the current administration has the means or the time to stabilise the situation before things get worse continues as Zimbabwe’s economy has weathered storm after storm.

For the time being, gold is still in demand because, although its sparkle may support money, it cannot adjust exchange rates. Furthermore, as Zimbabwe draws nearer to yet another round of wage talks and currency modifications, the true worth of its gold-backed currency will be put to the test by both foreign markets and the same citizens it is supposed to support.

More: The Zim Bulletin