Zimbabwe Central Bank Vows Tight Monetary Policy to Stabilize Struggling Currency

John Mushayavanhu, governor of Zimbabwe’s central bank, (Cynthia R Matonhodze/Photographer: Cynthia R Matonhod)
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Zimbabwe’s central bank has pledged to maintain a tight monetary policy stance throughout the year to stabilize its newly introduced currency, the ZiG, which has lost 48% of its value since its launch nine months ago.

Reserve Bank of Zimbabwe (RBZ) Governor John Mushayavanhu announced that high interest rates and other measures will be used to keep monthly inflation in single digits, following a significant slowdown in consumer-price gains.

Monthly inflation dropped to 3.7% in December from a peak of 37.2% in October, reflecting the impact of the central bank’s efforts to rein in price increases. However, the ZiG, Zimbabwe’s latest attempt at a gold-backed currency, continues to struggle as residents overwhelmingly prefer the US dollar for transactions and as a store of value. Approximately 90% of transactions in the country are conducted in US dollars, undermining confidence in the local currency.

Interest Rates and Economic Growth

To combat inflation and support the ZiG, the RBZ has raised its key interest rate to 35%. Despite the currency’s challenges, Zimbabwe’s Treasury remains optimistic about economic growth, forecasting a 6% expansion in 2024. This growth is expected to be driven by a recovery in the agricultural sector and increased activity in the iron and steel industry.

Governor Mushayavanhu emphasized that the central bank’s forthcoming 2025 Monetary Policy Statement will outline additional measures to transition the economy from stability to sustained growth. “The forthcoming statement will further contextualize and consolidate these positive prospects, and proffer more fine-tuning policies to move the economy from stability to growth,” he said.

Targeted Finance Facility

In late 2023, the RBZ introduced the Targeted Finance Facility (TFF), a special-purpose vehicle designed to finance productive sectors and stimulate economic growth. Unlike previous initiatives, the TFF will be funded from banks’ statutory reserves held at the central bank, ensuring that no new money is created in the process.

“It is important to note that the TFF will be financed from the pool of banks’ statutory reserves at the Reserve Bank, implying that there is no new money created to finance it,” Mushayavanhu explained. He added that the TFF serves as both a liquidity management tool for the RBZ and a catalyst for increased lending to productive sectors of the economy.

Promoting ZiG Usage

The central bank is also implementing policies to boost the usage of the ZiG in both physical and electronic forms. While the US dollar dominates cash transactions, electronic transactions processed through Zimbabwe’s Real-Time Gross Settlement (RTGS) system are increasingly conducted in ZiG, accounting for about 40% of such transactions.

Mushayavanhu highlighted the RBZ’s commitment to enhancing the flexibility and convenience of the ZiG for the transacting public. However, the currency’s success remains uncertain, given Zimbabwe’s history of failed currency reforms. Since 2008, the country has introduced five different currencies, all of which have collapsed due to hyperinflation and a lack of public confidence.

Challenges Ahead

The ZiG’s struggles reflect broader economic challenges in Zimbabwe, where years of mismanagement, corruption, and policy missteps have eroded trust in local institutions. The dominance of the US dollar in everyday transactions underscores the uphill battle faced by the RBZ in restoring faith in the ZiG.

As the central bank works to stabilize the currency and curb inflation, the success of its efforts will depend on its ability to address structural issues in the economy and rebuild public confidence. For now, the RBZ remains focused on maintaining tight monetary policies and supporting key sectors to drive growth.

Reporting by Bloomberg, with additional context and analysis.