Zimbabwe’s New Gold-Backed Currency Faces Early Challenges

Spread the love

HARARE, – Last month, Zimbabwean officials introduced a gold-backed currency, the ZiG, to stabilize the country’s beleaguered economy. While the initiative was initially hailed as a significant step, concerns have already emerged about its implementation and potential pitfalls.

The ZiG, backed primarily by 2.5 tons of gold and $100 million in foreign exchange reserves, was launched at an initial rate of 13.56 per dollar. However, it is currently trading at 9.96 ZiG to a dollar. Available in denominations ranging from 1 to 200 ZiG, the currency is also set to be minted as coins.

Despite the promise of stability, the government has begun pressuring miners to increase gold production to expand the money supply. This early push suggests the government might already be leaning towards inflationary practices, raising alarms about the long-term viability of the gold-backed system.

The ZiG and Its Intended Stability

The Zimbabwe African National Union-Patriotic Front (Zanu PF) asserts that the ZiG’s value is derived from gold, a stable asset. The currency’s value against the US dollar will fluctuate with gold prices on the international market, theoretically providing stability due to gold’s relatively stable price.

However, the introduction of the ZiG aims to counter Zimbabwe’s troubled monetary history, which includes hyperinflation and the collapse of previous currencies. In 2009, Zimbabwe abandoned its currency in favor of foreign currencies, mainly the US dollar, after hyperinflation wiped out the Zimbabwean dollar’s value. The country reintroduced its dollar in 2016, which also failed due to excessive money printing.

Concerns Over Government Actions

The new currency’s success hinges on government restraint in money creation, a lesson starkly highlighted by the US experience in the 1930s. During the Great Depression, the Federal Reserve was limited in expanding the money supply due to the gold standard. President Franklin D. Roosevelt’s eventual steps to untether the dollar from gold underscore the challenges of maintaining a gold-backed currency.

In Zimbabwe, similar pressures are already evident. Mines and Mining Development Minister Winston Chitando recently urged miners to boost gold production to support the new currency. This move hints at a potential increase in the money supply, counteracting the gold standard’s intended restraint.

The Future of the ZiG

Zimbabwe produced 30.1 tons of gold in 2023, with a target of 40 tons for 2024. While increasing gold production theoretically supports a larger money supply, the early push for higher output raises questions about the government’s commitment to maintaining the ZiG’s gold backing.

The ZiG’s stability depends on the government’s adherence to the gold standard’s principles. The early indications of expansionist pressures are concerning and suggest that the government’s mindset may not have shifted significantly with the introduction of the new currency. Observers will be closely watching to see if Zimbabwe can truly uphold the discipline required to maintain the ZiG’s value.

About the Author:

Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida. This was first published here by the Money Metals.