• The RBZ’s contractionary framework (35% policy rate, NNCD sterilisation, payment deferrals, and engineered ZiG scarcity) successfully engineered stability
• High real lending rates and liquidity starvation reinforced currency stability, inflation,  dollarisation,  while limiting ZiG’s transactional role in the economy
• However, it has crowded out private investment, raising sustainability concerns absent complementary fiscal reforms

Harare- Zimbabwe's adoption of a contractionary monetary policy stance by the Reserve Bank of Zimbabwe (RBZ) under Governor John Mushayavanhu, following the collapse of the Zimbabwe dollar (ZWL) in April 2024, represents a deliberate shift toward monetary restraint aimed at anchoring expectations, curbing monetary overhang, and restoring credibility to the nascent Zimbabwe Gold (ZiG) currency.

Introduced on April 5, 2024, as the country's fifth post-hyperinflation attempt at a sovereign medium of exchange, the ZiG, initially pegged at approximately 13.56 per USD and backed by gold holdings, foreign currency reserves, and precious metals, was designed to achieve price stability, rebuild monetary confidence, and create conditions conducive to sustainable economic growth.

However, in its early phase, the currency encountered significant adverse shocks, including fiscal pressures from hosting the SADC summit in Harare, which prompted expansive quasi-fiscal operations through accelerated payments to road contractors for maintenance and construction. These operations injected substantial liquidity into the system leading to a rapid expansion in reserve money and broad money aggregates that far outstripped reserve backing, reserve money surged by over 200% between April and September 2024, while broad money growth exhibited explosive dynamics in local currency components, creating a severe monetary overhang and pushing the parallel market premium to peaks of 80% or higher, reminiscent of the seigniorage-driven collapses of prior local currencies.

Faced with the imminent risk of another premature currency failure due to fiscal dominance and unchecked liquidity creation, authorities executed a sharp one-off devaluation of roughly 43% on September 27, 2024, adjusting the official exchange rate from around 13.9 ZiG per USD to 24–25 ZiG per USD. This adjustment imposed substantial balance sheet losses on banks, financial institutions, and depositors, effectively eroding the real value of ZiG-denominated claims by nearly half overnight and triggered a pivot to aggressive contractionary measures.

The RBZ raised the policy interest rate to 35%, a record high in Africa, sustained through 2025 and into early 2026 imposing severe credit rationing on the private sector.

Concurrently, the authorities deployed non-negotiable certificates of deposit (NNCDs) to sterilize excess liquidity, enforced higher statutory reserve requirements, and deferred fiscal obligations to contractors, suppliers, and exporters.

By mid-2025, domestic arrears had ballooned, with the state owing PGM exporters hundreds of millions in USD-equivalent ZiG portions (against H1 2025 PGM export receipts of around $690 million), alongside billions in ZiG-denominated liabilities to construction firms (Bitumen curtailing staff and deferring projects, Masimba shifting toward private-sector work) and agricultural suppliers like SeedCo.

These measures successfully curtailed reserve money expansion, with month-on-month broad money growth in ZiG terms averaging around 2% in 2025, while robust commodity-driven foreign exchange inflows particularly from gold, remittances and tobacco bolstered USD liquidity and shifted the broad money composition in favour of USD.

The contractionary framework has delivered tangible disinflationary outcomes, with ZiG year-on-year inflation decelerating sharply to 4.1 percent in January 2026, the first single-digit reading since 1997 down from 15% in December 2025 and much higher levels earlier in the cycle.

Month-on-month inflation has approached near-zero territory in recent periods, reflecting suppressed aggregate demand and engineered ZiG scarcity. USD-denominated inflation has also moderated into low single digits. Official claims suggest ZiG usage in transactions has risen to around 40–45%, yet empirical evidence from corporate disclosures indicates persistent high dollarisation, with major firms (Delta Corporation, Econet, Innscor) deriving over 80–90% of revenues in USD, and broad money aggregates showing ZiG components at roughly 17%. RBZ reported that growth in the ZiG component of broad money slowed to around 2% in 2025, down from over 10% in 2024, reflecting tighter monetary policy.

This asymmetry shows that inflation control has been achieved largely on a narrow base: the ZiG's limited circulation (currency in circulation constituting a small fraction of aggregates) and enforced scarcity prevent it from serving as a viable medium for pricing or settling most transactions particularly fuel, capital goods, electronics, international services, or informal-sector activity, which Zimstat estimates at approximately 76% of businesses. In this context, the celebrated single-digit inflation largely reflects USD stability and ZiG suppression rather than broad-based price anchoring grounded in fundamentals.

Upsides of the policy are evident in short-term macroeconomic stabilization: avoidance of hyperinflationary relapse, narrowing of the parallel market premium from over 80% peaks to around 29%, modest reserve accretion supported by commodity tailwinds, and enhanced predictability in the dominant USD segment, enabling smoother business navigation and planning amid reduced volatility.

The approach has also leveraged external windfalls from elevated global gold prices and remittances to fortify external buffers without reigniting domestic liquidity pressures.

Downsides, however, are pronounced and structural. The policy has entrenched dollarization, contrary to the government's de-dollarisation rhetoric by starving the economy of affordable ZiG liquidity and credit, crowding out private investment.

Corporate distress is widespread. Firms report curtailed expansion due to working capital shortages, with examples including Willdale nearing insolvency, Beta Bricks remaining under management, Afdis constraining growth, and OK Zimbabwe facing acute liquidity strains. The persistent parallel premium  distorts incentives, eroding exporter margins via the 30% forex surrender requirement (delivering overvalued ZiG) and forcing suppliers to quote at black-market rates.

Fiscal arrears shift quasi-fiscal burdens to private balance sheets, risking supplier insolvencies, project delays, and reduced formal-sector activity in an already informal-heavy economy.

Forward-looking, the contractionary stance has provided critical near-term breathing room, averting immediate crisis and positioning the economy for modest recovery, World Bank projections indicate around 5% real GDP growth in 2026 (following an estimated 6.6% rebound in 2025), while the IMF forecasts 4.6%, supported by agricultural normalisation, mining momentum, and sustained commodity strength.

However, sustainability remains contingent on complementary reforms. Clearing domestic arrears to restore fiscal-monetary congruence, enhancing ZiG reserve transparency and credibility, gradually easing scarcity to expand circulation without re-igniting inflation, narrowing the parallel premium through market-oriented mechanisms, and implementing structural measures to boost productivity, formalisation, and private credit access.

Absent these, the stability risks fragility, reliant on administrative controls rather than market-determined fundamentals, and could prove counterproductive for long-term inclusive growth, potentially perpetuating dollarisation traps, suppressing investment, and exposing the economy to shocks from commodity price reversals or fiscal slippages.

In essence, while the policy has engineered a historic disinflation episode and exchange rate calm, its net contribution to durable economic prosperity hinges on transitioning from repression to genuine confidence-building and broader monetary participation and without that evolution, it risks entrenching stagnation in the formal sector while the informal USD economy bears the stabilisation burden.

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