Harare, Zimbabwe (News of The South) – Zimbabwe’s new gold-backed currency, the ZiG (Zimbabwe Gold), launched in April 2024, is facing an uphill battle for acceptance and stability. The International Monetary Fund (IMF) is strongly advocating for the ZiG to become the country’s sole legal tender, a move they believe is crucial for economic stabilization. However, this push comes amidst widespread public skepticism, a thriving informal market dominated by the US dollar, and reports of businesses struggling and even closing due to the mandated use of the ZiG.
IMF’s Stance and Involvement
The IMF’s involvement in Zimbabwean currency policy is rooted in its mandate to promote global monetary cooperation, financial stability, and sustainable economic growth. Zimbabwe has a history of currency instability and hyperinflation, leading to multiple attempts at introducing new local currencies, none of which have achieved long-term success. The ZiG is the sixth such attempt since 2009.
The IMF views the ZiG as a significant step towards restoring public confidence in Zimbabwe’s financial system and reducing reliance on the US dollar. They are currently weighing whether to place Zimbabwe on a staff-monitored program (SMP), which would bring the country closer to revamping its substantial debt pile with creditors. For this to happen, creditors seek assurances that Zimbabwean authorities are pursuing prudent fiscal and monetary policies.
Wojciech Maliszewski, the IMF’s mission chief, has stated that for the ZiG to fully become the national currency, several measures are needed, including deepening the foreign exchange market to ensure full price discovery and eliminating the gap between the official and parallel market exchange rates. The IMF believes that enhancing ZiG adoption requires reforms such as strengthening monetary and fiscal policies and improving currency stability.
The “Flattiron” Effect: A Devaluation and Lack of Convertibility
The phrase “ZiG was hit by a flatiron” isn’t a standard economic term, but it likely refers to a significant and negative impact, akin to being pressed flat or severely devalued. Indeed, the ZiG has already experienced considerable turbulence. While initially backed by US dollars and mineral reserves, the ZiG devalued by 43% in September 2024, an attempt to narrow the gap between the official and unofficial exchange rates. This devaluation, coupled with the currency’s limited convertibility, has eroded public trust and led citizens to continue favoring the more stable US dollar.
The Promises and Perils of ZiG
The government’s intention with the ZiG is to provide a stable exchange rate after years of hyperinflation and end the dollarization of the economy. Being gold-backed, the ZiG theoretically offers stability and acts as a hedge against inflation. Proponents suggest it could lead to more predictable money transfers and allow the central bank greater control over monetary policy.
However, the reality on the ground paints a different picture. The success of the ZiG hinges on public trust and consistent government policy, both of which have been historically lacking. Despite efforts to integrate the ZiG into formal transactions, adoption rates remain low, with a significant majority of Zimbabweans still preferring the US dollar.
Businesses Struggle and Closures
Reports from the Confederation of Zimbabwe Retailers (CZR) confirm the closure of some formal chain stores. A major challenge facing the formal sector is the multi-currency system, where businesses are legally compelled to accept the ZiG at the official exchange rate, while suppliers often demand US dollars. This creates significant exchange rate distortions.
Informal traders, largely operating exclusively in US dollars, gain a competitive edge by avoiding these regulations and taxes. Formal businesses, burdened by operational costs in US dollars (like fuel for generators) and forced to absorb losses from the official ZiG rate, find themselves in an untenable position. The widening gap between the official and black market rates for the ZiG exacerbates these issues, making it difficult for businesses to plan and profit. Supermarket chains have even “impaired” their investments in Zimbabwe to a book value of zero due to the deteriorating economic conditions.
What will using ZiG prove?
For the ZiG to prove its worth and truly become Zimbabwe’s sole tender, it needs to demonstrate several key characteristics:
– Stability: Consistent value and predictable exchange rates against major foreign currencies.
– Convertibility: Ease of exchange to and from other currencies, particularly the US dollar.
– Liquidity: Sufficient supply in the market to facilitate transactions across all sectors.
– Public Trust: Widespread acceptance and confidence among citizens and businesses, which can only be earned through transparency, consistent policy, and a functional market.
– Integration with the Informal Sector: Given the dominance of the informal economy, its successful integration into the ZiG system is paramount.
Without these crucial elements, the push for ZiG to become the sole tender will likely continue to face strong resistance, potentially leading to further economic distress and a deepening of the parallel market. The coming months will be critical in determining whether Zimbabwe’s latest currency experiment can finally break the cycle of instability and lay the groundwork for genuine economic recovery.
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