The Zimbabwe Gold, popularly known as the ZiG, and whose standard kicked in at ZWG, is holding on well, four months after its launch. Data shows that the USD/ZWG was trading at 13.76 on Tuesday, a few points above its first-day trading value of 13.56.
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Zimbabwe Gold is 4 months old
Zimbabwe’s shot of having a stable currency is going on well as the recently launched ZiG currency continued doing well.
Data by the central bank shows that its value has dropped slightly against the US dollar, which is understandable since most African currencies have fared worse.
The currency has only dropped by about 1.47% in the past four months. In contrast, the Real-Time Gross Settlement Dollar (RTGS), which lost over 80% of its value between January and April.
The RTGS currency was introduced by the central bank in 2019 to replace the bond notes and coins that were initially pegged to the US dollar. It was formed by merging these notes, coins, and bank balances to form the RTGS dollar.
The Zimbabwe Gold currency hopes to create trust by ensuring that they are all backed by gold and the US dollar. Initially, it was supported by $100 million in cash and over 2.5 tons of gold, figures that have risen gradually in the past few months.
After the ZiG was introduced, all bank balances and even the stock market were rebased to match the new currency.
Why the USD to ZIG is stable
The USD/ZWG exchange rate has been stable for several reasons. First, the currency is still rare in Zimbabwe, such that most people have never seen it.
Second, the official exchange rate is not market-driven and is highly controlled by the central bank, which lists it on the website each day.
In this regard, the country’s central bank has taken measures to prevent the secondary market, which it blamed for tanking the previous currencies.
Third, the government has put in place measures to force companies to use the currency. For example, all Zimbabwe companies must now pay about half of their tax obligations in ZiG while some taxes are only payable using the currency.
Many government services are also only made through the ZiG currency, which helps give it value.
Additionally, the ZiG has received support from the International Monetary Fund (IMF), whose delegation noted:
“Price stability would be best achieved by stabilizing the ZiG nominal exchange rate against a suitable basket of currencies (accounting for the dominant role of the USD in the economy). This could be in turn accomplished by controlling base money growth: for now through unremunerated Non-Negotiable Certificates of Deposits.”
The government is now working to ensure that the ZiG is the only legal tender in the country by 2026. In April, the goal was to have the currency as the legal tender by 2030.
Will the Zimbabwe ZiG survive?
The Zimbabwe ZiG has ensured a period of stability for now but there are concerns about its future price action. The government hopes that the currency will maintain its strength and make the country similar to other countries that have their independent currencies.
Still, analysts believe that the ZiG faces major headwinds in the long run. The biggest challenge is that many people in Zimbabwe have a long memory of the past five currencies. Most of these currencies started well before imploding.
When a currency devalues, it leads to significant impacts on the residents. Savers who had their funds in banks saw them lose their value substantially. Similarly, the cost of importing products surged, hitting the economy.
As a result, telling these same people to put their trust on another currency will be a tough call. This explains why many people still believe in the US dollar. While the use of the greenback has dropped to about 75%, it is still the most commonly used currency in the country.
The currency faces other risks. For one, it is unclear whether Zimbabwe has the necessary funds to support the currency in times of strains. Most pegged currencies like the Hong Kong dollar always come under pressure, pushing the central bank to intervene.
Hong Kong’s peg is supported by over $400 billion in reserves. Just recently, the Zimbabwean central bank was forced to intervene in the forex market as the ZiG came under pressure from soaring import demand.
Additionally, the government has maintained that it will not print the currency to fund its budget. However, as a government that runs a budget deficit, it is unclear how it will be able to fund its budget if it moves fully into the ZiG. Ideally, to fund a budget, the government will need to have an equal amount of gold and the US dollar in the other side of the equation.
Therefore, for these reasons, I believe that many Zimbabweans with savings will be better served by maintaining them in US dollars.
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