THE Zimbabwe Gold (ZiG) currency, introduced just two months ago, was hailed as a potential solution to Zimbabwe’s ongoing currency issues. Pegged to the global gold price, the ZiG aimed to provide a more secure alternative to previous denominations like the Bond Notes and RTGS.
However, its rapid devaluation against the US dollar has raised serious concerns among economists, policymakers, and citizens alike. Recently, the Reserve Bank of Zimbabwe (RBZ) expressed its commitment to boost recognition of the ZiG on the global market as an official currency. But is this achievable for the struggling currency?
Historically, Zimbabweans have harboured deep mistrust toward the RBZ and government. In 2008, hyperinflation reached staggering levels, causing the Zimbabwe dollar to lose its value entirely, leading to its abandonment in 2009.
Since then, foreign currencies, primarily the US dollar, have been widely used throughout the economy. Therefore, the ZiG faces the critical challenge of gaining public confidence over the greenback.
The government’s credibility remains fragile, and this lack of trust directly impacts confidence in the ZiG. Investors and ordinary citizens alike hesitate to embrace a currency tied to an institution with a tarnished track record.
While the ZiG’s gold backing theoretically shields it from volatility, the reality is more complex. Insufficient gold reserves, coupled with a lack of US dollar holdings, weaken the ZiG’s foundation.
A currency’s stability relies on robust reserves, allowing it to weather economic storms. Unfortunately, the ZiG’s reserves fall short, leaving it vulnerable to speculative attacks and market fluctuations. In this light, the RBZ’s plan to position the ZiG as a globally recognised currency is highly ambitious at the present moment. However, achieving this recognition would signal Zimbabwe’s economic stability and credibility on the international stage.
The ZiG’s limited scope of accepted uses exacerbates its woes. With denominations restricted to 1, 2, 5, and 10 units, everyday transactions become cumbersome.
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A study by Equity Axis showed that prices are often rounded up to the nearest US dollar in the highly informal economy, rendering the ZiG almost impractical for daily commerce.
As a result, businesses and consumers continue to rely on the US dollar, undermining the ZiG’s intended purpose. Zimbabwe needs comprehensive economic reforms beyond currency stability. Addressing structural issues, improving governance, and promoting investor-friendly policies are essential.
The government’s response to the ZiG’s devaluation has been forceful. Crackdowns on illegal foreign currency traders and businesses that resist pricing goods in ZiG mirror past coercive tactics. However, these measures have failed to instill confidence. It is imperative to note that currency stability is not achieved through force; it requires market trust and a transparent, market-driven approach.
Currency is not merely a numerical representation; it is a psychological construct. Confidence in the currency hinges on collective belief. The ZiG lacks this intangible quality.
Zimbabweans remain sceptical, viewing the ZiG as yet another experiment in a long line of failed currency ventures. Restoring faith necessitates addressing both structural and psychological aspects through favorable and open market policies.
Allowing the ZiG’s exchange rate to float based on market forces could restore confidence. Artificially propping up the currency has not worked in over a decade. A more flexible approach, even if it means short-term volatility, might be necessary. Transparency in exchange rate determination is crucial. In achieving this, the RBZ should engage in dialogue with international bodies and demonstrate commitment to aligning with regional and global standards.
This would mark the ZiG’s path to global recognition, benefiting the country through foreign investment and facilitating international trade, as investors and businesses prefer stable currencies for cross-border transactions. To encourage wider acceptance and usability of the ZiG, businesses need incentives to price goods in ZiG, and consumers must find it convenient for day-to-day spending. Before the currency is accepted globally, it must gain acceptance in all sectors of the local economy, particularly in government tax and fuel.
- Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — twdumah@gmail.com or tinashed@equityaxis.com, Twitter: TWDuma_
