• Marginal YTD Decline but Fragile Stability: A modest 3% year-to-date (YTD) depreciation but concerns persist over its long-term sustainability
• Structural Challenges Undermine Confidence: The ZiG faces significant hurdles, including a 52% anticipated depreciation in 2025, rampant quasi-fiscal operations (QFOs)
• Reforms Critical for Long-Term Stability: Address key issues such as controlling money supply growth, eliminating export surrender requirements, curbing quasi-fiscal activities

Harare- The Zimbabwe Gold (ZiG), the nation’s fourth currency initiative in nearly a decade, has experienced marginal year-to-date (YTD) depreciation of 3%, declining from ZiG25.795 on January 1, 2025, to ZiG26.4879 by February 24, 2025.

The currency faced its steepest YTD depreciation on January 22, 2025, when it weakened to ZiG26.7116,  and the worst since inception in late September 2024 marking its most significant decline since its introduction in early April 2024.

At that time, the Reserve Bank of Zimbabwe (RBZ) implemented an overnight devaluation of 43%, a move aimed at addressing market imbalances and restoring stability.

Since then, the ZiG has maintained relative stability in the formal market, largely due to the RBZ’s stringent monetary policy measures.

The current official exchange rate was established following a unilateral devaluation by the RBZ, which adjusted the currency from its initial pegged rate of approximately 1:13 set at its launch in April 2024.

The government had initially believed that its gold reserves would be sufficient to sustain the fixed exchange rate.

However, mounting pressure from the parallel market, where exchange rates diverged by as much as 100%, exposed the vulnerabilities of the official rate.

This divergence worsened confidence erosion in the currency.

A critical factor contributing to the currency’s challenges is the RBZ’s expansion of money supply, which grew by nearly 100% at the M0 level between June and August 2024.

This liquidity injection was primarily directed toward infrastructure development, particularly roads construction and rehabillitation ahead of the SADC Summit.  

That rapid increase in money supply exacerbated inflationary pressures and undermined the currency’s stability.

The key question now is whether the RBZ can sustain its current tight monetary policy throughout 2025 or if the current stability is merely the calm before another storm.

Historically, the central bank has struggled to maintain long-term monetary discipline, raising concerns about the ZiG’s future trajectory.

In his 2025 budget statement, Finance and Economic Development Minister Professor Mthuli Ncube announced a fiscal budget of ZiG276.4 billion (equivalent to US$7.7 billion), emphasizing the government’s commitment to economic stabilization and growth.

To arrive at that US-dollar fiscal budget figure, the government applied an average exchange rate of 35.9 ZiG per US dollar, suggesting an anticipated depreciation of the ZiG to an average of 36 ZiG per dollar in 2025.

This projection contrasted sharply with the 2024 average exchange rate of 17.1 ZiG per dollar during the time, indicating an expected depreciation of 52%.

Such a steep anticipated decline raises concerns about the currency’s stability, hinting that the current period of relative calm may be temporary, a lull before another potential storm.

Zimbabwe’s history of monetary mismanagement, driven by excessive money supply growth to fund security forces, cover budget deficits, finance infrastructure projects, and support presidential initiatives reflects the fragility of the current situation.

RBZ continues to engage in quasi-fiscal operations (QFOs) in various forms, including subsidized bank loans for sectors such as agriculture, manufacturing, and small businesses, as well as targeted programs for women and youth.

These loans often carry interest rates below market levels, distorting financial markets and increasing liquidity.

For a sustained tight monetary policy to be effective, such practices must be curtailed.

According to the World Bank, in 2022, the RBZ’s QFOs accounted for 2.5% of GDP, contributing to a surge in broad money growth from 55% in September 2021 to over 1,000% by June 2023.

This rapid expansion of money supply, coupled with global inflationary pressures, drove domestic inflation to major peaks in August 2022 and June 2023, ultimately leading to the introduction of the ZiG.

For the ZiG to achieve long-term stability, the government must break from past practices.

Key reforms include eliminating export surrender requirements, which hinder exporters’ competitiveness, and addressing the persistent issue of excessive money supply growth.

Historically, annual money supply growth has exceeded 100%, a trend incompatible with currency stability.

Excessive liquidity forces the central bank to devalue the currency, creating a vicious cycle of depreciation and loss of confidence. This dynamic also fuels the parallel market, where exchange rates often diverge significantly from official rates.

In the past, premiums on the parallel market have reached as high as 100%, forcing the government to intervene with controlled exchange rates to prevent the local currency from collapsing.

Such interventions, however, have had detrimental effects on formal businesses, which are compelled to use the artificially maintained official exchange rate.

This disparity has driven many businesses out of operation, further eroding confidence in the local currency and its institutions.

Even now, as the premium between the official and parallel market rates has narrowed, market confidence remains fragile.

Businesses and individuals fear sudden devaluations and daily depreciations, prompting them to convert ZiG holdings into US dollars at the earliest opportunity to preserve value.

This behaviour reflects a deep-seated lack of trust in both the currency and the authorities managing it.

The government must demonstrate a commitment to fiscal and monetary discipline, moving away from short-term fixes and quasi-fiscal activities that undermine long-term stability and create demand for the currency.

Only then can the ZiG hope to gain the credibility needed to function as a reliable store of value and medium of exchange in Zimbabwe’s economy.

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