The Zimbabwe ZiG currency has remained under intense pressure in the past few months as the central bank’s experiment fails. The official USD to ZiG exchange rate has soared from 13.56 in April to 26.85, a 98% jump.
However, the real exchange rate, or the black market or the unofficial rate has done much worse. Data by ZimPriceCheck shows that the USD/ZIG rate has climbed to as high as 50, meaning that it has risen by over 268%.
The Zimbabwe ZiG has collapsed
The Zimbabwe Central Bank launched a large experiment in April when it did away with the Real Time Gross Settlement (RTGS) Zimbabwe dollar which had lost about 80% of its value since January.
The new currency was known as Zimbabwe gold or ZiG and was backed by gold and fiat currencies like the US dollar. Initially, the currency had reserves worth over $200 million.
Shortly after the launch, Zimbabwe converted all Zimbabwe dollar accounts, including the stock market into the new currency.
For a while, the Zimbabwe ZiG, whose code is ZWG, did well, leading to lower inflation in the country.
It was also hailed as a new beginning by some experts. A World Bank team that visited the country praised the currency for stabilising the economy. It also boosted Zimbabwe’s GDP estimate for the year.
Some of the initial gains, however, were not market-driven. Some analysts attributed the initial strength to its rarity since it was not easy to get. Also, the government put in measures to crack down on the parallel market, which it blamed for crashing the other currencies.
The USD/ZWG pair surged in September after the central bank accepted the reality and decided to devalue the currency. It devalued it by 43% to bridge the gap between the official rate and the black market rate.
Read more: USD to ZiG: As the Zimbabwe ZiG plunges, what next?
Weak fundamentals and confidence
Analysts believe that the Zimbabwe ZiG odds of survival were limited. As we wrote last week, Justice Malala, a popular commentator, noted that the government still had leaders who were in power for over four decades.
In that period, Zimbabwe has had five currencies, all of which have collapsed. Under President Mugabe, the government was forced to print money to fund its high budget after it came under heavy sanctions.
This cash printing led to hyperinflation, which pushed the central bank to print worthless trillion-dollar notes.
Some analysts believe that government spending has undermined the Zimbabwe ZiG. In a note last week, analysts at Imara Asset Management noted that the government was still overspending and tapping the central bank for funding.
The government has denied these claims, with the Finance Permanent Secretary saying that the Treasury had not tapped the overdraft facility. He also noted that the facility at the bank was denominated in local currency and not US dollars.
Other analysts warned that the Zimbabwe ZiG experiment was based on the wrong promise. Officially, the currency is backed by gold and US dollars. However, the reality is that it is almost impossible to convert the currency into gold or US dollars on a 1:1 basis.
This is unlike what popular stablecoins like Tether, USD Coin, and PayPal US dollar (PYUSD) promise. When you own 1,000 USDT, you can easily convert it into $1,000 within seconds.
Read more: USD to ZiG: Here’s why the Zimbabwe gold currency is falling
Confidence crisis continues
The most important reason the Zimbabwe ZiG has collapsed is a lack of confidence among citizens and businesses.
For a long time, Zimbabwe’s central bank has been launching new currencies, hailing them as new beginnings only for them to collapse.
The most recent one was the RTGS-based Zimbabwe dollar, which crashed by over 80% between January and April this year.
Therefore, most people who have suffered from the last currency devaluations, have vowed never to trust the government or the central bank.
As a result, the US dollar has become the most popular currency in Zimbabwe, accounting for over 70% of all transactions. Most Zimbabweans also save their cash in the US dollar.
All these factors have been compounded by the ongoing economic crisis in the country because of the prolonged drought, which has pushed the government to increase food imports.
What is the future of the Zimbabwe ZiG?
The initial success and stability of the Zimbabwe ZiG pushed the government to accelerate plans for de-dollarisation of the economy. The official government policy is that the ZiG will be the only legal tender in the country by 2030 or before.
However, the odds of this happening are significantly low as the ZiG continues falling and as confidence in the currency wanes.
Therefore, I believe the Zimbabwe Gold currency will continue falling in the coming years unless something drastic happens.
Besides, the ZiG is an experiment that has not been tried before. Zimbabwe’s challenge is that it does not have enough reserves to fully back the currency. For example, the main reason why the Hong Kong dollar peg has held steady is that the HKMA has over $400 billion in foreign reserves.
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