• Zimbabwe launches ZiG currency backed by gold reserves, aiming to combat hyperinflation and stabilize the economy
  • ZiG replaces the depreciated Zimbabwean Dollar as the official legal tender, with hopes of restoring confidence in the financial system
  • Success hinges on responsible currency management, widespread acceptance, access to US Dollars, and tackling illicit gold trade

Harare- Zimbabwe took a bold step on April 5th, 2024, by introducing a new currency called ZiG, which stands for Zimbabwe Gold. In a similar manner to the previous Bond Notes issued by John Panonetsa Mangudya, ZiG is backed by reserves of US$100 million in US currency and 2.5 tons of gold, valued at approximately US$185 million.

The introduction of ZiG means that it has replaced the Zimbabwean Dollar (ZWL) as the official legal tender for all transactions and debts, both public and private. All existing ZWL banknotes, mobile money accounts, and bank balances have been exchanged for ZiG at a rate determined by the global price of gold (London PM fix) on April 4th, and the ZWL interbank rate on April 5th.

The decision to introduce ZiG comes after the Zimbabwean Dollar experienced significant depreciation and hyperinflation. In 2020, the currency declined by 90%, followed by drops of 30% in 2021, 96% in 2022, and 98% in 2023, based on the parallel market rate. This resulted in an average depreciation of 80%, 25%, 84%, and 89% from 2020 to 2023, respectively.

In 2024, the currency continued to free-fall, with a staggering 99% depreciation rate year-on-year and a 74% depreciation rate in just three months, leading to inflationary pressures reaching 55.3% in March 2024, up from 26.5% in December 2023.

The crucial question now is whether the introduction of ZiG, which is scheduled to begin circulating on April 30th, 2024, will successfully revive the economy, considering that the previous sister currency, Bond Notes, failed despite being backed by US$200 million in reserves.

There are speculations that the government tends to resort to printing new money with a different name whenever it fails to manage the economy effectively.

However, if this speculation holds true, based on the history of Bearer Checks, Bond Notes, and now Zimbabwe Gold (ZiG), it is unlikely to work because currency is not solely about physical coins and notes but also about the confidence and trust that the market has in monetary officials. Unfortunately, Zimbabwe has a 0% track record in this regard.

Nevertheless, a more pressing question arises: What needs to be done for ZiG to succeed? According to the Reserve Bank Governor, John Mushayavanhu, ZiG is backed by US$285 million, which provides sufficient reserves to fully cover the money supply in the system, totaling ZWL2.6 trillion (equivalent to US$90 million).

However, while the current reserves may be adequate, it is crucial to continue accumulating more reserves to meet global best practices of maintaining at least three months' worth of import cover.

To achieve this, the government, the Treasury, and the Reserve Bank must learn to live within their means and refrain from engaging in illicit practices such as quasi-fiscal activities.

Going forward, the growth of ZiG's money supply should be limited to the growth of the Reserve Bank's reserve asset holdings, effectively preventing the government from printing ZiG indiscriminately, similar to what occurred during the Bond Notes period.

If this is implemented, ZiG has the potential to become a stable currency, curbing hyperinflation and the rapid dollarization of the economy.

Another crucial factor for ZiG's success is that it should be widely accepted for all purchases, and the government should collect taxes, including corporate taxes, in ZiG. There should be no need to convert ZiG to US Dollars for transactions such as buying fuel, paying for passports, driver's licenses, licenses, or any government taxes.

This approach would minimize exchange rate volatility and ensure stability. Gold, in general, is considered a safe-haven investment during economic downturns and financial crises due to its historical use as a store of value.

The third significant factor is that both companies and individual citizens should be able to access US Dollars through banks when needed, particularly for importing goods. This accessibility would help reduce activities in the parallel market.

Lastly, it is crucial to adopt advanced technologies for tracking and monitoring gold production to minimize leakages and illicit trading. According to the Information and Publicity Ministry, Zimbabwe loses at least US$100 million annually due to illicit gold trade.

Additionally, according to the Al Jazeera documentary "Gold Mafia," the country loses nearly, if not more than, US$100 million per month due to corruption. Monitoring and auditing processes can help combat criminal activities and corruption by analyzing information such as the exact source of gold, holders of gold buying licenses, and taxes paid on gold exports. Currently, around 60% of Zimbabwe's gold is mined illegally, with small-scale miners being the largest producers of this precious mineral.

By responsibly managing the printing of ZiG in line with the reserves held by the central bank and implementing effective monitoring and auditing systems to address gold leakages and corruption, the government can begin to tackle the underlying issue of lack of trust and confidence caused by policy failures.

Zimbabwe has already taken steps to accumulate gold reserves gradually since mid-2023 by accepting 50% of taxes in physical precious minerals.

The country's largest gold producers, including Kuvimba's Fredda Rebecca, Caledonia Mining Corporation, and Padenga Holdings, have contributed to an annual gold production record of over 2000 kilograms, with Fredda Rebecca alone producing over 4000 kilograms per year.

However, unfavorable economic conditions, such as onerous surrender requirements for the Zimbabwean Dollar and a burdensome tax regime, as well as electricity shortages and high charges, have hindered gold production in the country.

The introduction of ZiG currency may bring hope for a turnaround in this regard.

Therefore,  the success of ZiG as a currency and its ability to revive the economy will depend on several key factors. These include responsible management of the currency's issuance based on reserves, widespread acceptance of ZiG for transactions and tax payments, accessibility of US Dollars for imports, and the adoption of advanced technologies to monitor and minimize gold leakages and illicit trading.

By addressing these factors and instilling confidence in the market, Zimbabwe has the potential to overcome its economic challenges and pave the way for a more stable future.

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