Acting President of Zimbabwe, Chiwenga, says the government is working on strengthening the country’s new currency. The ZiG, as it’s called, was introduced earlier this year and started life at ∼1:13 to the USD.
However, since then, the ZiG has depreciated on the black market. The govt insists that the exchange rate has not flinched but the streets say the ZiG has depreciated by almost 100% against the USD.
The govt is aware of this divergence and has been making efforts to address it. We have seen mass arrests of money changers, who have largely been driven off the streets, and retailers’ bank accounts have been frozen for declining the ZiG or using the black market rate.
Despite these efforts, the ZiG has continued to depreciate on the black market, all while remaining somewhat scarce.
It’s important to note that the ZiG has brought a semblance of stability to the economy, despite its depreciation on the black market. Admittedly, the bar was low, given that the ZWL it replaced was a disaster, and any alternative would have been an improvement.
A few weeks ago, we asked Liquid, the largest IAP in the country, whether the ZiG had brought relief, and they responded:
Liquid Intelligent Technologies Zimbabwe believes that the ZIG has brought stability and predictability and curbed the FX losses that we used to face in the country due to the ZWL and arbitrage. We are confident that we can plan and execute our business initiatives positively, as the ZIG has, overall, brought a positive outlook to the economy, our local operations in Zimbabwe, and the Liquid Group in general.
There is no denying that the ZiG has brought some relief. However, with it having already lost half its value, concerns are growing that it may rapidly descend to the depths the ZWL fell to.
Govt working to stop/reverse ZiG slide
Chiwenga stated:
Government will continue to monitor the operations of our financial markets and promote efforts to grow and stabilise our national currency.
That’s all well and good, but it’s easier said than done. If these efforts mainly involve playing Tom and Jerry with money changers and forcing retailers to accept the ZiG at the official, non-market rate, then we have a long road ahead of us.
The acting President also said:
Let me assure you that government is working to promote the wider use of our local currency and is putting in place measures that will eliminate gaps that are creating arbitrage opportunities in the exchange market.
How the govt will promote the wider use of the ZiG is not immediately clear, unless it simply means making the ZiG more available across Zimbabwe—something that has yet to be fully realised.
What kind of measures can eliminate the gaps creating arbitrage opportunities? Chiwenga is correct that arbitrage exists, which means there is an opportunity to exploit the difference between the official and black market exchange rates for profit.
To remove the arbitrage opportunity, the govt would need to bring these rates into alignment. As long as there are different rates, the opportunity for profit through currency trading will remain.
One way to achieve this would be to allow the official rate to be determined by market forces, rather than setting it from an air-conditioned office somewhere in Harare.
We know the chances of the govt taking this route are slim. So, we are left wondering what exactly the measures Chiwenga mentioned will look like.
De-dollarisation
Chiwenga also said:
No nation will develop without sovereign control, defence and growth of its own national currency. Our government introduced the Zimbabwe Gold as our new sovereign currency. It is our responsibility as a nation to embrace and protect the new currency as a bedrock and anchor of our economic development.
While it’s true that having control over one’s currency might make economic development easier, it’s important to remember that of all the countries with their own currencies, more have weak currencies than strong ones.
In any case, the notion that no nation will develop without controlling its own currency is simply not accurate.
Countries without currency control
Many successful economies have developed while using a currency that isn’t fully sovereign or is pegged to another.
For instance, Eurozone nations have experienced development and growth using a shared currency. Some have even suggested that Zimbabwe consider adopting the South African rand. While South Africa has its challenges, the rand could make sense for Zimbabwe.
Similarly, countries like Ecuador and Panama have grown while using the US dollar as their legal tender. These countries undermine the govt’s argument, as they are using the very currency that Zimbabwe claims cannot support growth.
Zimbabwe differs from Panama and Ecuador in that those countries formally adopted the USD as their sole currency—Panama in 1904 and Ecuador in 2000—while Zimbabwe adopted a multicurrency policy, with the USD rising to prominence.
None of these countries has a formal agreement with the US. They simply take advantage of the USD’s status as a global reserve currency.
Yet, Panama has become a major financial and banking hub in Latin America by using the US dollar, offering monetary stability and attracting international businesses and investors.
Using the US dollar has also helped Ecuador reduce inflation and promote stability.
Zimbabwe, however, has not fully committed to dollarisation and has instead engaged in local currency shenanigans, leading to instability.
In short, a sovereign currency is not a prerequisite for economic growth and development.
Trust and confidence
The Zimbabwean govt seems hell-bent on abandoning the USD and other foreign currencies in favour of exclusive use of the ZiG within a few years. However, given their poor track record with currencies, it’s understandable why Zimbabweans are apprehensive.
This is further compounded by the fact that many prerequisites for a successful currency have not been met, meaning the ZiG is rolling uphill. We are talking camel through the eye of a needle levels of odds of success.
Currency value is built on trust, stability, and strong governance. For a new sovereign currency like the ZiG to succeed, the govt needs to demonstrate fiscal discipline, transparency, and the ability to manage inflation.
A successful currency requires widespread acceptance both domestically and internationally. It’s premature to discuss international acceptance when even Zimbabweans remain sceptical of the new currency.
If the govt forces a swift adoption of the ZiG without ensuring it can compete globally, it risks economic isolation. Businesses will find it harder to trade or access forex if they are locked into using a currency that is not widely recognised. This stifles growth rather than promote it.
This has been the Zimbabwean story.
Real growth
If the govt is truly focused on economic growth, it needs to address the real hindrances facing Zimbabwe. Not having a sovereign currency is the least of the country’s problems. Some might even argue that not having a sovereign currency could be an advantage.
Economic development depends on many factors beyond currency control, such as the strength of industries, infrastructure, governance, and human capital. On the latter point, Zimbabwe has lost many of its brightest minds to other countries.
Having control over a currency, without addressing broader economic issues such as corruption and inefficiency, will not automatically lead to development. Zimbabwe needs to improve its economic fundamentals before tackling currency policy.
Share
Home
What’s your take?