Zimbabwe’s new gamble

Zimbabwe has a long and troubled history with its currency. After a period of hyperinflation in the early 2000s, the country abandoned its currency in 2009 and switched to a multi-currency system dominated by the US dollar. However, economic woes persisted, leading to the reintroduction of a local currency, the Zimbabwean dollar (ZWL), in 2019. Unfortunately, this attempt backfired, causing renewed inflation.

In April 2024, Zimbabwe took another stab at currency reform with the launch of the ZiG (Zimbabwe Gold). This time, they're hoping a gold-backed currency will be the answer.

The ZiG: A New Approach

Unlike previous currencies, the ZiG is backed by a "basket" of assets, including:

- Foreign currency reserves: US$285 million at launch, raising concerns about its adequacy.

- Gold: 2.5 tonnes of gold currently held by the Reserve Bank of Zimbabwe (RBZ), with plans to increase gold production and channel it into the reserves.

- Other precious metals and minerals: Platinum, lithium, and diamonds mined in Zimbabwe could also contribute to the reserves.

The ZiG's value is tied to the price of gold and a comparison of inflation rates between the ZiG and the US dollar. This, in theory, should provide stability and prevent hyperinflation. Link here.

Can the ZiG Succeed Where Others Failed?

Skeptics abound. Critics point to the following weaknesses:

- Insufficient reserves: The current reserve value is considered too low to provide real import cover or meet regional liquidity recommendations.

- Government mismanagement: Zimbabwe's history of economic troubles raises doubts about the government's ability to manage the ZiG effectively.

- Lack of trust: Years of currency instability have eroded public trust in Zimbabwean currency.

A Glimmer of Hope?

Despite the criticism, there are some potential positives:

- Gold-backing: Gold is a historically stable store of value, and linking the ZiG to it could provide some stability.

- Increased gold production: Zimbabwe's plans to boost gold production could strengthen the ZiG's reserves in the long run.

The Verdict: Too Early to Tell

The success of the ZiG remains to be seen. Only time will tell if it can overcome public skepticism and become a stable and trusted currency.