Harare, – Zimbabwe’s ZIG currency, introduced in April 2024, is facing significant challenges as its value continues to decline against the US dollar in the parallel market.
Initially pegged at a rate of 15 to 1 against the USD, the currency managed to maintain this value for two months. However, in recent weeks, the parallel market rate has plunged to 22 to 1, raising concerns about the ZIG’s viability.
Eddie Cross, a former member of the Zimbabwean Central Bank’s monetary policy committee and advisor to President Emmerson Mnangagwa, expressed his concerns about the currency’s future. “If this trend continues, the ZIG is wounded and will not recover,” Cross stated, emphasizing the urgent need for decisive action.
The introduction of the ZIG was initially met with optimism, with the Reserve Bank of Zimbabwe (RBZ) Governor claiming that the currency was backed by substantial reserves in hard currency and gold. However, the rapid depreciation of the ZIG on the parallel market has cast doubt on these assurances.
The situation has reignited the debate over Zimbabwe’s use of a multi-currency system, which includes the USD, UK Pound, South African Rand, and several other foreign currencies. The multi-currency system was adopted in 2009 after the collapse of the Zimbabwean dollar, a move that stabilized the economy and curbed hyperinflation. However, while the system brought temporary relief, it also led to a decline in local production, as the country became increasingly dependent on imports.
Cross highlighted the historical context, noting that Zimbabwe’s previous currency collapse in 2008 was due to the reckless printing of money to cover fiscal deficits. He contrasted this with the experience of Rhodesia, which maintained a stable currency despite international sanctions and a protracted war by adhering to conservative fiscal policies.
“When Mthuli Ncube took over the Ministry of Finance in 2018, he identified similar issues—a runaway fiscal deficit and an over-reliance on printed money,” Cross explained.
“The introduction of the RTGS dollar brought temporary relief, boosting local production and reducing imports. But the progress was short-lived, as mismanagement of the currency auction system led to the collapse of the RTGS dollar.”
The recent decline of the ZIG mirrors the struggles of its predecessors. Despite the RBZ’s efforts to enforce a fixed exchange rate of 14.5 to 1 against the USD, the informal sector has exploited the disparity between the official and parallel market rates.
“Retailers are left with ZIG in their accounts that no one wants, while the informal sector thrives by buying goods at the official rate and selling them for hard currency on the parallel market,” Cross noted. This has led to a downturn in the formal sector, with job losses mounting and tax revenues falling.
During a recent walkabout with government advisors, Cross observed the stark contrast between the informal and formal markets.
“Basic goods produced locally are being sold below cost in the informal market, while the same products are priced significantly higher in supermarkets. This situation is unsustainable,” he warned.
The debate over Zimbabwe’s currency future has intensified, with some advocating for a swift de-dollarization process, while others caution against radical moves. Cross argued that the country needs its own stable currency to compete globally. He pointed to Japan and China as examples of major economies that strategically manage their currencies to maintain competitiveness.
“All our neighbours have stable currencies and do not allow the use of the USD in domestic markets. If we did the same, supported by sound fiscal and monetary policies, we could strengthen our currency and bring the informal sector into line,” Cross suggested. He added that such a move would curb illegal imports and price manipulation, benefiting the overall economy.
As Zimbabwe navigates this critical juncture, the future of the ZIG remains uncertain. Without swift and decisive action, the currency may join the ranks of its ill-fated predecessors, leaving the country once again grappling with the consequences of monetary mismanagement.