• Rapid Premium Surge: In just five months, the ZiG's premium skyrocketed to 122%, a  contrast to the initial 53% premium
• Retailers Abandon Formal Rates: Retailers have shifted their pricing strategies, now setting prices directly in ZiG and abandoning the formal exchange rate
• Lack of Production Underpins Instability: Zimbabwe's economy relies heavily on imports, lacking robust domestic production to support currency stability
• Fiscal Insanity Exacerbates Instability: The government continues to inject money into the economy 

Harare- The Zimbabwe Gold (ZiG), the country’s latest currency initiative, appears to be one of the most ill-fated ventures in a decade, especially when compared to its predecessors: Bond Notes, RTGS, and the Zimbabwe Dollar (ZWL).

In just five months, the premium for the ZiG has surged to 122%, a significant deterioration compared to the 53% premium observed during its first month. By the end of April, its value had plummeted to ZiG22 per dollar, while the formal market rate was just 13.6.

In contrast, the ZWL saw a depreciation of about 20% in its initial month, making the ZiG one of the more fortunate fiat currencies to have lasted this long.

Retailers have increasingly abandoned the formal exchange rate, signaling a shift in their pricing strategies. Unlike previous months when they merely adjusted prices based on USD valuations, many are now setting prices directly in ZiG, effectively sidelining the official market.

Econet has adopted a rate of approximately 21 ZiG per dollar for its data packages, while popular products like Mazoe Orange Crush at OK Zimbabwe are priced above ZiG99, contrasting sharply with the USD price of around $4.60.

This stark divergence indicates that retailers have turned their backs on the formal market rate, opting instead for a pricing strategy that reflects the realities of a fluctuating economy, further undermining any attempts to stabilize the currency.

The ZiG was launched in April 2024 as a response to the collapse of the prior currency regime, which had endured relentless devaluation and was nearing total failure. After a decade of utilizing multiple currencies, the Zimbabwean government made an attempt to reintroduce a local currency in 2019.

Unfortunately, the second version of the Zimbabwe dollar fell short of expectations, closing each year for five straight years with an average annual value loss of around 75%. Efforts to stabilize the currency under then-governor John Mangudya did not produce the desired results.

Following Mangudya’s departure, the idea for the ZiG was conceived.

When the ZiG was launched, the government claimed it was backed by 2.5 tonnes of gold. However, there is considerable skepticism regarding these reserves.

Zimbabwe's gold output hit rock bottom in 2008, with just 3 tonnes produced, and reserves remained non-existent until 2022.

It wasn't until October 2022 that the government began collecting reserves, mandating companies to pay part of their taxes (royalties) in precious metals.

Historically, tax payments in kind were common in medieval Europe, where taxpayers provided goods or services. Fast forward a millennium, and Zimbabwe has adopted a similar approach for miners’ royalties.

In October 2022, the government mandated that companies pay a portion of their royalties in minerals. On November 4, the President published a Statutory Instrument requiring miners to pay royalties partly in kind, foreign currency, and local currency.

Under the Mines and Minerals Act, miners owe royalties on their output to the Zimbabwe Revenue Authority (ZIMRA), with specifics outlined in the Finance Act.

From October 2022 to March 2024, estimated mining royalties accrued to just 1.5 tonnes, not the 2.5 tonnes claimed by the government, which aligns with independent forecasts.

This pattern mirrors the introduction of Bond Notes, where the government asserted the currency was supported by US$200 million. Over time, the actual reserves proved insufficient, leading to the currency's decline.

Similarly, the government continues to inject money into the economy under the ZiG, despite questionable reserves.

In June, reserves rose by 38%, from $853 million to $1 billion, while M3 nearly doubled, increasing from $5.4 billion to $9.2 billion. This has exacerbated exchange rate volatility and created substantial challenges for the currency.

The government consistently denies excessive money supply, blaming illegal money changers instead of addressing underlying issues like reserves and fiscal discipline.

To bridge the gap, the Reserve Bank of Zimbabwe (RBZ) has injected US$114 million into the interbank market, with US$64 million allocated in September alone.

However, Zimbabwe’s monthly import bill often exceeds US$200 million, meaning these injections cover less than 10% of import costs. Following these efforts, the exchange rate shifted from 28 to approximately 30-32 per dollar.

The detrimental effects of fiscal mismanagement on the ZiG are evident, particularly in the failure of the Quarterly Paid Dates  (QPDs) to stabilize rates. Unlike John Mangudya’s tenure, during which rates stabilized from July to December 2023, the current situation is troubling.

It is particularly concerning that RBZ Governor said well-established organizations, such as CBZ, the Chamber of Mines, CZI, and ZNCC, initially supported the introduction of the ZiG.

John Mushayavanhu even stated that the Bank drew heavily from a paper presented by CZI, claiming, “We didn’t invent ZiG; it was invented by CZI.” It raises questions as to why these respected entities failed to foresee that the ZiG was built on unstable foundations, unless if we are to say RBZ did not follow CZI recommendations.

Zimbabwe needs to confront reality before establishing its own currency: it must build substantial reserves, ensure transparency, and practice fiscal responsibility. The value of the ZiG in the formal market is not determined by market forces; instead, the RBZ sets the rate, making it vulnerable to the same failures experienced by previous currencies.

Even if reserves exist, a currency's value should be determined independently by market demand and supply. Pegging a currency removes market forces from price discovery, requiring the central bank to exercise extreme discipline to maintain stability.

Ultimately, like the ZWL, the government may find itself compelled to devalue the ZiG, mirroring the previous currency's fate.

Such a devaluation would only provide temporary relief, failing to address the core challenges at play. To achieve lasting currency stability, Zimbabwe must eliminate the fixed exchange rate system, adopt a rigorous monetary policy, and enforce strict fiscal discipline.

Unfortunately, the government currently seems unprepared to engage in this critical conversation.

Much more important, a stable currency is fundamentally backed by production, yet Zimbabwe’s economy operates primarily as a retail market that relies heavily on imports for nearly everything.

This dependency on foreign goods means that there is little domestic output to support the value of any currency.

Without robust local production, the economy lacks the necessary foundation to stabilize its currency, making it vulnerable to fluctuations and devaluation.

In essence, a currency cannot thrive in a landscape defined by consumption rather than creation; without a strong productive base, Zimbabwe’s currency efforts are destined for instability and failure.

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