In April 2024, Zimbabwe announced the launch of the Zimbabwe Gold (ZiG), a gold – backed currency to replace the Zimbabwean Dollar which had suffered massive devaluation.
Struggles of the Zimbabwean Dollar
The official exchange rate of the Zimbabwean dollar surpassed 30,000 Zimbabwean dollars per U.S. dollar in April 2024, whilst the parallel market rate reached 40,000 per U.S. dollar. This was the latest in a steep devaluation of the country’s currency that has driven the country’s inflation rate to 55.3% in March 2024.
Although an initially stable economy at independence from Britain in April 1980, problems in the Zimbabwe economy emerged as early as the 90s due to a combination of factors including mismanagement, corruption, and controversial land reform policies. During this time, the Zimbabwean dollar rose rapidly against the dollar.
In the coming years the country would fight to keep the Zimbabwean dollar afloat to no avail, by 2008 the exchange rate had reached ZW$500 billion to $1, making ZW$1 billion worth less than a cent as hyperinflation peaked at inflation peaked at 79.6 million percent in November 2008.
Zimbabwe averaged an inflation rate of 43 percent from 2009 until 2023, reaching up to 78.6 percent in May 2020. To tackle this, Zimbabwe introduced a multi – currency system in 2009 after the hyperinflation of the Zimbabwean dollar hit its peak.
Mugabe’s Economic Policies
Robert Mugabe stands as a pivotal part of Zimbabwe’s political sector since independence having served as the country’s president for 30 years after succeeding the country’s first president Canaan Sodindo Banana in 1987.
Mugabe inherited a solid economy when he was elected prime minister in 1980. Despite enduring years of United Nations sanctions and the onslaught of war, Zimbabwe had strong infrastructure, a solid currency, vibrant manufacturing and a productive agricultural sector. However, Mugabe would go on to plunge Zimbabwe into economic crisis with a string of policies.
In October 1997, Mugabe yielded to pressure from veterans of Zimbabwe’s liberation war and approved unbudgeted, one-off pension distributions of 50,000 Zimbabwean dollars to all bona fide veterans who participated in the anti-colonial war against the white minority government plus additional monthly pensions of 2,000 Zimbabwean dollars.
In 1998, the Zimbabwe dollar lost half of its value in less than two months, following the deployment of Zimbabwean troops to the Congo to support then Congolese President Laurent-Desire Kabila, who was facing a rebellion. The war cost Zimbabwe an estimated $1.7 million a month between 1998 and 2002 which increased the country’s debt levels.
In 2000, president Mugabe infamously sanctioned the invasion of white-owned farms for redistribution to blacks without land – a decision that saw agricultural output plunge due to many of the new owners lacking the experience and resources to maintain farm productivity.
Under this land reform program introduced in the 2000s, the farms that were supposed to benefit landless Black farmers ended up benefiting Mugabe, his wife Grace, his allies and political supporters. Grace Mugabe was said acquired more than 15 farms, spanning at least 16,000 hectares. This was the final nail in the coffin for Zimbabwe’s economy under Mugabe as the country would never recover from this.
Money Printing Craze
In 2009, Gideon Gono, then governor of the Reserve Bank of Zimbabwe, issued a ZW$100 trillion note in January 2009, which exacerbated poverty and hunger amid shortages of basic commodities. A month later, the market dumped the Zimbabwe dollar in favor of the U.S. dollar, forcing the government to adopt the latter as the main currency.
In addition, the Zimbabwe government printed vast sums of new currency in order to finance military action in the Democratic Republic of the Congo, as well as import enough food to reduce the risk of nationwide starvation.
The drive to ramp up food imports turned out to be another catalyst for hyperinflation as Zimbabwe found itself in greater debt—denominated in foreign currency. On top of this, no attempt was made by the Mugabe regime to curtail other forms of government spending and political looting by societal elites and government officials.
The explosion in the volume of currency in circulation due to money printing caused a rapid increase in prices. This hyperinflation in Zimbabwe was also due to institutional corruption and a lack of confidence in the government and currency as while printing currency to finance military efforts and food imports, the Zimbabwe government underreported its money printing activities by over 20 million dollars a month.
In an effort to correct the falling value of Zimbabwe’s currency, the Reserve Bank of Zimbabwe simply increased its money printing efforts, declared inflation illegal, redenominated its currency from Z$5, Z$10, and Z$20 bills into Z$100,000,000 and Z$200,000,000 bills, intentionally avoided updating its foreign exchange rates or inflation rates, and announced new currency regimes that did not address the underlying causes of inflation and further reduced citizens’ confidence in the stability of currency. The redenomination went so far that Z$100,000,000,000,000 (One Hundred Trillion) dollar notes were injected into circulation.
This made the Zimbabwean dollar virtually worthless, forcing people to barter goods or use foreign currencies for transactions. As a result, the black market for foreign currencies became a common method for obtaining basic goods and services at a relatively consistent value, despite the illegal use of foreign currency.
Arrival of the Zimbabwean Gold
In April 2024, Zimbabwe rolled out a new gold-backed currency called the ZiG, or Zimbabwe Gold, in an effort to mitigate the currency instability and hyperinflation that plagued the country. The ZiG at the time was said to be backed by 2.5 tons of gold and $100 million in cash reserves.
The Zimbabwean central bank thereafter asked citizens to convert the country’s previous national currency, the Zimbabwe dollar, into ZiGs while stating it was “recalibrating its monetary policy framework to re-anchor price and exchange rate stability and to boost confidence in the local currency”.
The Zimbabwean Gold is a digital currency, but Zimbabwe also issues 22-carat gold coins that can be converted into cash, which serves as a physical counterpart to the digital currency. The Zimbabwe Gold, is Zimbabwe’s sixth attempt at a stable currency in 15 years after a bout of hyperinflation under leader Robert Mugabe.
The idea behind the currency is that money supply will be limited to the amount of gold the country possesses, which would then theoretically prevent excessive inflation drawing inspiration from the Gold Standard from the 20th century.
The ZIG’s introduction was greeted with a mix of cautious optimism and scepticism from citizens expecting a similar outcome to the previous five attempts at introducing a domestic currency.
However, what Zimbabwe did not factor in at the time is that maintaining a gold-backed currency also requires managing gold price fluctuations as they would soon find out.
Devaluation of the Zimbabwean Gold
Zimbabwe’s central bank allowed the local gold-backed currency to fall over 40% in late September, to 24.3902 to the U.S. dollar. The currency has since fallen further, to 27.6880 to the dollar as of Friday, according to the central bank’s website.
The unexpected devaluation was prompted by the need to contain resurgent exchange rate pressure which started back in August due to higher food import costs and a slide in mineral export sales. The central bank decided to ease this pressure by lowering the value of the currency instead of burning reserves to keep its value steady at 13.9 ZiG per dollar.
in the aftermath of the devaluation the Zimbabwean Gold has weakened even further to more than 26 ZiG per dollar as of 18 October. This has raised speculation that it will continue to weaken and further worsen the country’s currency challenges.
Significance of Devaluation
Zimbabweans have shown remarkable resilience but an unstable currency has left a deep and lasting impact across generations. It has shattered the plans of older citizens forcing them to leave the future in the hands of their children. It has also made it impossible for citizens to earn a decent livelihood. Youths now feel defeated and confused.
If Zimbabwe does not succeed in restoring confidence in the local currency, these struggles would be passed on to future generations. The devaluation of the ZiG might reignite inflation, increase costs for businesses and threaten to stifle investment as it would deter foreign investors worried about the ZiG as a reliable store of value.
The Way Forward
There is a need to prioritize public spending by undertaking fiscal reforms to channel more resources towards health, education, public infrastructure and other critical investments needed to boost growth.
The corruption of public officials that has brought Zimbabwe to this point should also be addressed. There should be disciplinary measures in place for erring public officials and any effort to print more money should be greatly opposed.
A more sustainable approach to private – sector led economic growth should also be pursued in order to enable the government spend more on essential services aimed at improving the living standards of citizens.
