Why ZiG-Backed Currency Faces Uncertain Future

Zimbabwe’s fragile economy has made the ZiG currency, introduced with high hopes in April, a target of both skepticism and mounting challenges.

Since its launch, the ZiG has failed to stabilize. Backed by gold, it was seen as a solution to Zimbabwe’s currency crisis, yet it’s been undermined by a weak policy environment and limited public confidence.

In September, the ZiG’s value tumbled by 44%. This is due to overwhelming demand for US dollars, which hold higher trust within Zimbabwe. Since April, ZiG has lost over 100% in value officially and a staggering 270% on the black market.

The ZiG’s struggles reveal five major challenges that threaten its viability.

1. Gold Price Disconnect

Although linked to gold, the ZiG keeps depreciating, even as gold prices climb. Since January, gold has risen 28%, surpassing $590 per ounce. However, Zimbabwe’s reserve—just 2.5 tonnes—is insufficient to secure this currency.

The Reserve Bank claims it has ample reserves, but economist Gift Mugano disputes this. He suggests that the currency requires $4.5 billion in reserves to achieve stability, allowing for six months of import cover.

Investment expert Ranga Makwata notes a lack of credibility. As gold prices climb, the ZiG drops, casting doubt on its backing. Makwata contends the ZiG resembles a fiat currency, dependent on public trust eroded by past hyperinflation.

2. Deep-Rooted Mistrust

Lack of transparency at the ZiG’s launch has fueled public distrust. The currency’s adoption remains limited, with no enforcement on essential services like fuel and passport issuance, which remain priced in USD.

Many businesses, vendors, and transportation services reject ZiG payments, favoring the US dollar and South African rand. These rejections persist despite government threats, which further diminish public confidence.

Since 2008’s hyperinflation crisis, the USD has dominated Zimbabwean transactions, accounting for 70% of exchanges, while only 30% involve ZiG. This highlights the enduring appeal of stable, trusted currencies over the uncertain ZiG.

3. Black Market Influence

Lack of trust in the ZiG has increased demand for the dollar, which now trades at higher rates on the black market. This parallel economy meets demand the official market cannot fulfill, covering only 20% of foreign currency needs.

Reserve Bank Governor John Mushayavanhu acknowledges a $100 million backlog. Application delays further push currency exchange to the black market, where market forces dictate rates.

Makwata asserts that the black market thrives due to the official market’s failure. Higher black-market rates make it attractive, sustaining an informal currency network that has gained public trust.

4. Excessive Money Printing

Money printing, historically a destabilizing force, continues to impact the ZiG. Makwata links devaluation to this over-supply, warning of another potential currency collapse as the government funds initiatives without adequate reserves.

Economist Prosper Chitambara highlights the temptation to increase money supply for the agricultural season, risking further erosion in currency value. In the early 2000s, similar actions fueled a crisis when money printing financed overseas military involvement.

Zimbabwe’s monetary practices reveal a disregard for sustainable economic policy, a pattern now threatening the ZiG.

5. Political Instability Limits Growth

Zimbabwe’s political environment deters foreign investment, contributing to the ZiG’s decline. Widespread allegations of human rights abuses and corruption have eroded trust, not only in the currency but also in governance.

Sanctions imposed on President Mnangagwa and associates underscore these challenges. The US Treasury reports Mnangagwa’s role in gold and diamond smuggling networks, weakening economic credibility.

Such conditions create a fragile economic landscape, discouraging investment and undermining the currency’s potential.

The Zim Bulletin