Harare,— Zimbabwe’s prolonged currency crisis, now spanning over two decades, continues to deepen, with little evidence of political will to address the situation, according to a new report from the Fraser Institute (FI).
The Canadian public policy think-tank’s Economic Freedom Country Audit Zimbabwe (EFCAZ), according to a local weekly publication, The Zimbabwe Independent, has raised alarm over the country’s ongoing monetary instability, warning that economic turmoil could escalate unless urgent policy changes are implemented.
As the country grapples with the ongoing volatility of Zimbabwe Gold (ZiG), the latest currency introduced in April 2024, experts are concerned that the lack of sound economic policy and poor currency management are pushing the nation closer to a boiling point. Zimbabwe’s currency troubles have persisted for more than two decades, exacerbated by multiple currency shifts, high inflation, and lack of public confidence in the local financial system.
A Long History of Currency Instability
Since the early 2000s, Zimbabwe has faced severe economic challenges, with its currency undergoing numerous changes in a desperate attempt to stabilize the economy. In 2009, Zimbabwe abandoned its currency entirely after experiencing a staggering 500 billion percent inflation rate, turning to foreign currencies such as the US dollar and South African rand. The country reintroduced local currency in 2014 in the form of bond notes and coins, but these were soon replaced by the RTGS dollar in 2019. The Zimbabwe dollar made a brief return in 2019, only to be abandoned again in favor of a multi-currency system in 2020 due to the Covid-19 pandemic. In April 2024, the government unveiled the Zimbabwe Gold (ZiG) as the country’s latest currency attempt.
However, the failure of successive currencies to hold value, alongside the volatility of ZiG, has led many to question whether Zimbabwe’s monetary system will ever stabilize.
Fraser Institute’s Economic Freedom Audit
The Fraser Institute’s report underscores the country’s poor performance in terms of sound money, a critical factor for economic stability. According to the FI’s Economic Freedom of the World (EFW) survey, Zimbabwe ranked 172nd globally and 46th in sub-Saharan Africa for economic freedom. The report highlighted the absence of economic growth, commodity backing, foreign currency reserves, and market confidence as key contributors to Zimbabwe’s inability to establish sound money.
Zimbabwe’s sound money rating has been consistently low, particularly from 2017 to 2021, placing it among the worst in the world. The country’s poor ranking correlates directly with high inflation rates and economic instability, leading to a lack of investor confidence. The FI noted that this has discouraged both domestic and foreign investment, further stalling the country’s economic development.
“Low sound money ratings typically correlate with high inflation rates and economic instability, leading to a lack of confidence among consumers and investors,” the report stated. “A poor sound money rating discourages both domestic and foreign investment due to perceived risks associated with unstable currencies and inflationary pressures.”
Impact on Investment and Growth
The lack of monetary stability has profound implications for Zimbabwe’s growth. Inflationary pressures and currency volatility have deterred foreign direct investment, which is crucial for economic development, while simultaneously reducing tax revenues that the government relies on for public spending. This has compounded the country’s economic challenges, leading to widespread public dissatisfaction.
Economist Lovemore Kadenge expressed concern over the ongoing volatility of ZiG, noting that the exchange rate has fluctuated drastically in a short period. “You remember when our currency was at about ZiG13.44 per dollar just a few weeks ago? And then it changed to ZiG25 per US dollar. Now, it is almost ZiG30 per dollar,” he said. “The policymaker is saying now the US dollar is equal to 1, but we know that in the informal sector, it’s now ZiG40. Currently, it’s almost ZiG50.”
This exchange rate disparity between the official and informal markets underscores the instability of the Zimbabwean currency, further eroding public trust.
Recommendations for Policy Change
The Fraser Institute suggests that Zimbabwe needs to adopt a more disciplined approach to currency management. FI Economic Freedom of the World director Fred McMahon recommended that Zimbabwe consider following in the footsteps of countries like Ecuador, which solved its inflation crisis by adopting the US dollar as its official currency. However, McMahon also acknowledged that if Zimbabwe wants to retain control over its currency, the government must empower the central bank to act independently from political influences, particularly in relation to controlling inflation.
“The central bank needs to have independence from the government to set policies related to controlling inflation and not related to the government’s economic or political priorities,” McMahon said. “With the right expertise and independence, a central bank can stabilize the currency and restore confidence in the economy.”
The Fraser Institute also urged the Zimbabwe Investment and Development Agency (ZIDA) and the government to consider the findings in its report as a roadmap to economic stability. The report emphasized the importance of policies that promote sound money, investor confidence, and sustainable economic growth, which could help Zimbabwe fulfill its national development goals outlined in the Vision 2030 framework.
As Zimbabwe continues to battle its currency crisis, the government faces increasing pressure to implement effective reforms that will restore public trust and provide a foundation for long-term economic recovery.