Zimbabwe’s new ZiG zag likely doomed by critical overall lack of transparency

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The struggle to stabilise Zimbabwe’s economy continues, with no signs of relief for ordinary citizens. The recently introduced currency, Zimbabwe Gold (ZiG), seems destined to suffer the same fate as the five previous attempts to create a local currency.

Zimbabwe’s economy thrives on informal trade, with most traders operating outside the banking system. The Reserve Bank of Zimbabwe’s decision to introduce the ZiG electronically before hard currency is available has sparked panic. An informal trader in Harare told ISS Today about widespread trading disruptions and uncertainty among fellow dealers.

The gold-backed ZiG was due to be rolled out on 8 April (the date has since been pushed to 30 April). Anyone found with notes amounting to Z$100,000 (about $2) after the ‘start’ date would have to explain why they had that amount of cash. As a result, many traders are refusing to accept Z$ notes and deal solely in forex. The few accepting Z$ doubled their prices, leaving consumers earning local currency poorer.

The trader said the public transport sector was also affected, with operators refusing to accept the outgoing local currency for local trips and transacting only in US$. Commuters ended up paying $1 for a trip that cost 50c.

The new currency comes after the Z$ lost over 70% of its value in the first three months of 2024. Inflation now stands at 2,647% — the highest in the world.

The economic and currency collapse emanates from bad governance, irrational policies and disregard for economic fundamentals that define the Zimbabwe African National Union-Patriotic Front (Zanu-PF) regime.

The first currency collapse occurred because of the unbudgeted 1997 Democratic Republic of the Congo military misadventure and payments to liberation war veterans. After the local currency lost 74% of its value in one day, the state defaulted on its debt payments and was suspended from international financial institutions. This led to a poorly planned and ill-timed land reform programme and sanctions from the European Union, United Kingdom and United States (US).

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The economic crisis inspired by this misgovernance continues today, with a brief reprieve from 2009-13 when the Government of National Unity demonetised the local currency and established a multi-currency regime with the US$ dominating the markets.

Despite multiple attempts over the past nine years to reintroduce the local currency, confidence in the government’s ability to manage the economy is low. This stirs up scepticism among citizens and markets, exacerbating the economic downturn.

The ZiG’s introduction reflects the government’s latest desperate effort to address its financial challenges. However, the lack of transparency surrounding the move and the history of governance failures and fiscal indiscipline under Zanu-PF leadership makes the new currency’s viability unlikely.

Iron fist dispels trust

President Emmerson Mnangagwa’s administration, which took power in 2017 with the promise of reform and economic revival, has failed to win citizens’ confidence. The government hasn’t moved away from Zanu-PF’s command and control philosophy, which pervades Zimbabwe’s politics and economics. In previous research, the Institute for Security Studies concluded that the government’s control of the Reserve Bank and in turn, monetary policy, prevented the bank from functioning properly.

The trust deficit between citizens and the government has had tangible repercussions for policymaking and implementation. The ZiG’s launch has been shrouded in secrecy and devoid of public consultation — another example of the government’s often unilateral approach and disregard for accountability.

Confidence in the new currency and trust in its management is central to its success. But from the outset, the ZiG’s introduction has been messy. No explanation was given for postponing the date that notes would be circulated, leaving citizens and markets to navigate the complex payment web of using electronic ZiG, the physical Z$, and the US$.

The currency crisis has at its core the Reserve Bank’s dabbling in non-monetary activities such as the exchange rate — ostensibly to stabilise the new currency — instead of allowing the market to determine the exchange rate.

Shrouded in secrecy

Moreover, the government has not disclosed the amount of gold reserves backing the ZiG. The Reserve Bank says it has 2.5 metric tonnes of gold in its vaults and an undisclosed amount in offshore vaults. The reserves held in Zimbabwe are hardly enough to cover a few months’ expenditure, and the lack of clarity feeds suspicions that the country doesn’t have enough gold to back a new currency.

Until Zimbabweans can go about their daily lives with only ZiG in their wallets and seamlessly trade it for any currency at an exchange bureau worldwide, the ruling elite’s promise of economic stability remains an illusion. Having initially pegged the ZiG at 13.52 to the US dollar, the new currency seems to be taking a hit on the black market trading at US$1:ZiG18 — an indication of things to come.

Zimbabwe has no choice but to address the trust deficit and restore confidence in the government’s ability to manage the economy. Four interventions are needed.

First, transparency must be prioritised in all aspects of governance, particularly economic policymaking. Pertinent information regarding the ZiG, including its fundamentals and mechanisms for exchange rate determination, must be disclosed.

Second, broad-based consultations with the private sector and citizen representatives are imperative before implementing sweeping changes like currency reform. Inclusivity ensures that diverse perspectives are considered, enhancing the legitimacy and effectiveness of new initiatives.

Third, the Reserve Bank must allow the market to determine the exchange rate without intervening in the forex market. In the past, the ‘guidance’ of monetary authorities saw the parallel market flourish and deviate from basic supply-and-demand rules.

Fourth, government must show a commitment to fiscal discipline and responsible economic management. Clear and consistent policies, coupled with prudent financial stewardship, are essential to instil investor confidence and stimulate economic growth. Addressing corruption and improving governance practices are also vital.

Zimbabwe’s former finance minister Tendai Biti observes that the new currency is destined to fail in the current policy environment, and that renewed calls for re-dollarising are the likely outcome. The country’s governance crisis remains a significant barrier to economic stability and prosperity. DM

First published by ISS Today.