Zimbabweans reject the ZiG as the “gold-backed” currency loses value again within 72 hours of devaluation

Harare – Zimbabwe’s newly introduced gold-backed currency, the ZiG, continues its downward spiral against the US dollar, raising concerns about the nation’s economic stability.

Despite being devalued by a significant 43% by the Reserve Bank of Zimbabwe (RBZ) just last Friday, the ZiG weakened further on Monday, trading at 24.88 per dollar, up from Friday’s rate of 24.39.

This latest devaluation, which saw the official exchange rate jump from ZiG14.1 to ZiG24.3 per US$1 on Friday, has been met with scepticism and concern. Economist Lyle Begbie of Oxford Economics, while acknowledging the positive nature of recent adjustments, cautioned that they are unlikely to be sufficient in the long run. He pointed to persistent current account and fiscal deficits, coupled with limited access to external capital markets, as significant factors continuing to exert pressure on the ZiG.

RBZ Governor John Mushayavanhu, in an interview with the state-controlled Sunday Mail, attributed the devaluation to an “artificial spike” in demand for foreign currency, exacerbated by inflationary pressures. He explained the rationale behind the move, stating:

“The underlying value of the structured currency (ZiG) is designed to mimic the movement in the prices of reserve assets backing it and the inflation differentials. In this regard, as communicated in the April 2024 Monetary Policy Statement, the intervening exchange rate shall be determined by the inflation differential between ZiG and USD inflation rates and the movement in the price of the basket of precious minerals held as reserves.

“In this regard, while the gold price has been firming, suggesting appreciation of the gold price-implied exchange rate, the country has witnessed increased inflationary pressures as evidenced by month-on-month inflation of 1,4 per cent in August 2024 and 5,8 per cent in September 2024, thus offsetting the firming gold price. This has, therefore, underscored the need for a price discovery mechanism to align the exchange rate with the macroeconomic dynamics underpinning the structured currency.

“The movement in the exchange rate is expected to play a critical shock-absorbing impact on the prevailing excess liquidity in the economy, which helps anchor inflation expectations and minimise the inflation differentials going forward,” said Mushayavanhu.

Introduced in early April as a replacement for the rapidly depreciating Zimbabwean dollar, the ZiG, said to be backed by the country’s gold and hard-currency reserves, was intended to provide much-needed stability. However, the current situation raises questions about its long-term viability. According to Mushayavanhu, the current reserves for the ZiG stand at US$380 million.

The Governor further elaborated on the challenges facing the ZiG in a separate interview with The Sunday Mail, highlighting the limited number of foreign currency sellers operating under the willing-buyer, willing-seller system. He described the Friday adjustment as a response to temporary pressures, asserting that they do not reflect the true state of the country’s economic fundamentals. He stated:

“The current interbank foreign exchange market under the willing-buyer, willing-seller trading arrangement has always allowed market forces to determine the exchange rate, while the backing of the ZiG using gold and other reserve assets is critical for ensuring limited exchange rate volatility caused by transitory demand-supply shocks. However, the challenge with the multi-currency system is that there are limited sellers of foreign currency, making it a buyers’ market, as generators of foreign currency, have an option to settle domestic transactions in foreign currency, hence less incentives for them to convert.

“Under the current exchange rate arrangement, the Reserve Bank can intervene in the market in the event of transitory exchange rate pressures not linked to economic fundamentals. The bank, however, allows the exchange rate to adjust in line with the obtaining market conditions. This is the stance the Reserve Bank has taken today. As such, the exchange rate has always been market-determined. This position was clearly stated in the April 2024 Monetary Policy Statement.”

The devaluation has sparked widespread rejection of the ZiG by merchants, public transport operators, and other businesses.

A farmer in Bulawayo expressed his frustration, stating, “Our suppliers have been refusing to accept ZiG for a long time, and this devaluation is only going to worsen the situation, so why should we accept it?”

This sentiment is echoed by others, including cab drivers who are unable to purchase fuel with the currency. One driver pointedly asked, “If I cannot fuel with the currency, pay levies, and it’s also devaluing, why should I accept it then?”

The devaluation has also impacted civil servants, with one teacher lamenting that their salary, received before the devaluation, has effectively lost half its value while prices remain unchanged.

The Amalgamated Rural Teachers Union of Zimbabwe (ARTUZ) has called for salary adjustments to reflect the devaluation, urging Finance Minister Mthuli Ncube and the government to take immediate action.

Zimbabweans, having endured multiple currency devaluations over the past 15 years, are acutely aware of the devastating impact of such events on their savings. The government and the central bank face a significant challenge in restoring public confidence in the ZiG and convincing the nation that this latest iteration of the currency can withstand the current economic pressures.

With headline inflation already at 1.4% in August and expected to worsen due to the devaluation, the government’s assertion that the devaluation will ease inflation is met with considerable scepticism.

The Consumer Council of Zimbabwe (CCZ) has reported widespread rejection of ZiG payments by traders, further exacerbating the currency’s woes.