How Can Zimbabwe Strengthen Its Already Sliding New Currency?

“I think, for 90 percent of Zimbabweans, the feeling whenever there’s a decree around a local currency is that it won’t work. The trust has been eroded to that degree,” researcher and market analyst Farai Mudzingwa tells OkayAfrica. “The government and the citizens have been trying to play this cat and mouse game where the government keeps trying to reintroduce local currency, while citizens are always resistant because we don’t trust the government. That’s the cycle we’ve been in since.”

Mudzingwa adds, “By the time [a new currency] reaches its first anniversary, it’s lost so much value, usually over 100 percent.” In the late 2000s, the Zimbabwean dollar had been redenominated three times with different currency codes, all of which failed to survive hyperinflationcaused by the rampant corruption of government officials, unchecked printing of money, implementation of a disastrous land reform policy that reduced production capacity, and sweeping economic sanctions placed on companies and government officials by the U.S. and the European Union.

In 2009, the central bank and the government approved using several foreign currencies as legal tender, including the South African rand, euro, British pound sterling, and, most popularly, the U.S. dollar.

In 2019, President Emerson Mnangagwa reinstated the fourth Zimbabwean dollar (ZWL), and outlawed the use of other currencies as legal tender in the country. ZWL quickly lost value and brought back hyperinflation.

In its introduction, the government said this new currency is backed by over 2.5 tonnes of gold, precious minerals equivalent to 0.4 tonnes of gold, and $100 million in cash. “Initially, they showed people the reserves, but I think the broader problem is saying the currency is backed by gold,” Mudzingwa says. “People are fascinated by the idea of something being backed by gold, but what does it mean in the grand scheme of things?”

Currently, the Zimbabwean economy is still heavily dollarized, to the point where the government and its agencies collect some taxes and offer some services in USD rather than the local currency, per Mudzingwa. It’s looking like ZiG is headed on the same path as the currencies before it.

However, there could be some salvaging, which, according to economist Prosper Chitambara, requires fiscal and monetary discipline and political will. Below, Chitambara breaks down what it means for the ZiG to be a gold-backed currency and the practical steps to help improve its value.

OkayAfrica: What does the ZiG being gold-backed mean?

Prosper Chitambara: They are calling it a structured currency. How it’s supposed to work is that the supply of the local currency must be linked to the supply of USD and gold reserves. It means that if there’s an increase in the local currency, it must be matched by a corresponding increase in the reserves, either gold or USD.

Why has it lost so much value already?

It’s not working because a currency must be anchored by trust and confidence by the economic agents. What is happening in Zimbabwe is because of years of chronic hyperinflation. The impact of high inflation is that it causes people to lose confidence in that currency. So people don’t want to transact in the currency or even store their wealth in that currency. People prefer to transact in USD over ZiG because the former is more stable.

Also, the stability of any currency is a function of the country’s reserves. We currently have reserves of about $500 million, both gold and USD. That’s grossly inadequate to cover the ZiG sufficiently or stabilize the exchange rate. We need at least three months of import cover at the minimum, which equates to about $3 billion. The central bank has been trying to maintain a managed exchange rate system [but] you can’t sustain that when you don’t have adequate reserves to intervene effectively.

Another challenge is that our economy is now highly informal owing to years of deindustrialization. We have witnessed a significant growth of informal economic activities, so it’s difficult to influence the economy. We are not producing adequately—production is an issue, but so is productivity. Our productivity levels across all the critical sectors of our economy are low, and it also has to do with the high cost of doing business in the country.

The loss of value has been due to these factors and the unsustainable growth in the money supply. When money supply growth is too high, and production is not [matching] that increase in aggregate demand, it creates inflationary pressures in the economy. It means there’s too much money chasing too few goods, which causes the local currency to lose value.

What practical steps can help improve the value of the ZiG or any other local currency introduced later?

First, we need to manage our public spending to align with our revenues. What has been happening is that our public spending has outstripped our revenues, and the government incurred deficits last year. For example, our fiscal deficit was 6.5 percent of GDP, which is significant. Because of the high deficit, the government is forced to borrow locally or print money to finance that deficit. Maintaining prudent, conservative, and contractionary fiscal and monetary policies is critical because we can never solve our problem without fiscal and monetary discipline.

We need to continue addressing the business environment. Zimbabwe has a huge tax burden across all sectors of our economy. We must strengthen key institutions, including the central bank, to ensure its independence and autonomy. If the central bank is not independent, the central government can always influence it to print money to finance government spending.

We need a lot, but we can at least fix the macroeconomic issues by ensuring more discipline in managing our finances. Institutional reforms are critical in restoring confidence and trust in the economy, government, and currency.