• Rapid Currency Decline: From 13.9 to 24.9 to 25 to 26 against the US dollar in less than 14 days
• Parallel Market Chaos: From 21 to 40 against the US in under two weeks
• Repeat of ZWL Collapse: Downward spiral mirrors collapse of ZWL, suggesting the government's attempt to cut zeros has failed

Harare- Zimbabwe's local currency, Zimbabwe Gold (ZiG), has taken a worrying plunge to ZiG26.0692 against the US dollar, continuing its downward spiral.

Last week, it traded at ZiG25.3578 on October 4, 2024, after the Reserve Bank of Zimbabwe (RBZ) deflated the currency to 24.39.

ZiG had been artificially pegged around the 13 region for nearly five months since its introduction, but its value has now been allowed to float, revealing significant underlying pressure.

The latest flops in Zimbabwe's currency market reveal a disturbing similarity between the Zimbabwean Dollar (ZWL) and the Zimbabwe Gold (ZiG).

It's as if the country's financial authorities simply cut zeros from the ZWL and rebranded it as ZiG, without addressing the underlying economic issues.

This move has led many to question the legitimacy of ZiG, labeling it another Ponzi scheme with a different name.

The harsh reality is that Zimbabwe's currency fundamentals are out of order, and the lack of discipline among currency authorities has resulted in a 43% overnight devaluation.

This drastic devaluation has caused significant losses, with someone who had 1 million ZiG losing a substantial amount of value. The impact is felt across the economy, eroding trust in the local currency.

To understand the impact, let's consider an individual with ZiG1 million.

Initially, when the exchange rate was US$1 = ZIG 13.9, the value of 1 million ZiG was approximately US$71,945 USD (1,000,000 ZIG / 13.9 ZIG/USD). However, after the devaluation to ZIG25, the value of the same 1 million dropped to around US$40,000

This drastic devaluation translates to a loss of approximately US$31,945 USD ($71,945 - $40,000). In percentage terms, this represents a staggering 44.4% loss ($31,945 / $71,945) x 100%.

Consequently, the demand for the US Dollar has surged, with locals quickly converting their ZiG to USD to avoid further losses. The preference for USD is so strong that it accounts for around 80% of transactions in Zimbabwe.

This undermines the very purpose of introducing ZiG, which was meant to mitigate currency instability and hyperinflation.

Therefore, the lack of order and foresight has become central bank’s own worst enemy when it comes to stabilizing the ZiG. Instead of taking proactive measures, the central bank is constantly reacting to market fluctuations, allowing the market to dictate terms.

This reactive approach has led to a loss of control, with the government now chasing the parallel market rate in an attempt to bridge the gap, rather than addressing the underlying issues

Zimbabwe's history of hyperinflation, which peaked at staggering levels in 2008, highlights the need for a robust economic plan to support its currency. Instead of rebranding or introducing new currencies, the government must address the underlying economic issues. The country requires fiscal discipline, economic stability, and a credible monetary policy to restore confidence in its currency.

These currency woes are symptomatic of deeper economic challenges like we have been saying in previous articles.

The continued depreciation of ZiG points to two critical questions: is it still a gold-backed currency? The performance of gold-backed currencies is typically underpinned by the value of gold.

When gold increases, the value of gold-backed currencies should also increase, but this is the opposite of ZiG. Instead, the local currency is now determined by demand and supply metrics, just like any fiat currency.

However, the parallel market rate has risen to ZiG40 per dollar, with local intercity buses taking ZiG 20 as equivalent to US$0.50.

This discrepancy suggests that the government continues to choke the rate, rather than allowing market forces to determine it.

The mismatch between the official and parallel market rates raises concerns about the currency's stability and fiscal gaffer’s approach to the cranking machine.

ZiG's depreciation indicates high fluidity in the market against the US dollar supply. When the rate spikes, it means liquidity is high; when it drops, liquidity is low.

To curb liquidity, the government may need to slow down programs, including infrastructure development in roads and dams.

Zimbabwe relies heavily on gold exports for foreign currency, but these exports are likely to fall behind the projected revised 35-tonne target meaning lower earnings in times of high demand.

The government's grip on the currency rate is stifling market forces. To achieve fiscal sanity, ZiG demands responsible fiscal management to prevent further depreciation.

Equity Axis News