Zimbabwe Replaces Local Dollar with Gold-Backed ZiG

Zimbabwe has replaced its faltering local dollar with a new gold-backed currency, named the Zimbabwe Gold (ZiG). This move, instigated by the administration of the President Emmerson Mnangagwa, indicates a major change in the nation’s monetary policy.

Launch of the Zimbabwe ZiG from Zimbabwe Dollar

The implementation of the ZiG was prompted by the continuous economic struggles experienced by Zimbabwe. The previous currency, the Zimbabwe dollar, was devalued severely, trading at Z$36,000 to the US dollar, having lost over three-quarters of its value in this year only. Thus, John Mushayavanhu, governor of the Reserve Bank of Zimbabwe, admitted that printing a large amount of money had a negative impact and resulted in the devaluation of the old currency.

The main goal of the ZiG is to add the stability to the national currency that is supported by a mix of foreign currency reserves, gold, and other valuable minerals.

The Reserve Bank of Zimbabwe is also holding about one tonne of gold in its vaults and has 1.5 tonnes offshore. The choice to back the new currency with tangible assets has been interpreted as a way of always creating trust and reliability in the country’s financial system.

Challenges and Skepticism

However, even after such attempts of shifting from the Zimbabwe dollar, economists and the citizens are skeptical. The role of the gold backing in guaranteeing the new money is uncertain because Zimbabwe has a low level of foreign exchange reserves and the country has a great history of monetary instability.

“Mattress banking” has been the popular term for many Zimbabweans, who have seen the erosion of their purchasing power and savings, that now prefer to save money at home rather than in banks.

Zimbabwe’s foreign exchange reserves are way too small in comparison with the other African nations. For example, Kenya has over $7bn in reserves, giving 3.7 months of import cover, while reserves in Zimbabwe hardly last for a month of imports. This discrepancy points to the difficulties that Zimbabwe confronts in bringing its new currency to stability.

International Relations and Economic Reforms

Efforts by President Mnangagwa to enable Zimbabwe’s reintegration into international markets and restoration of support from multi-lateral lenders has been unsuccessful due to un-reconciled debt and political problems in the country. However, the U.S. and other governments have shown hesitation in dealing with Zimbabwe, especially in the wake of accusations of rigging elections and human rights violations in the administration of Mnangagwa.

The ZiG, running with a band of other currencies, will be launched in eight denominations, bearing representations of gold bars and the famous Balancing Rocks. A 21-day period is given to Zimbabweans during which they can transition their old currency into the new ZiG. The fast change in these developments highlights the need for the government to work at restoring economic stability of the country.

The emergence of the ZiG coincides with a period of hyperinflation and economic suffering that is being faced by the people of Zimbabwe. The devaluation of the Zimbabwean dollar and hyperinflation over the last years have aggravated problems such as poverty, unemployment, and severe drought. The ZiG, as a result, is considered to be a crucial intervention to address these problems.

Reserve Adequacy and Monetary Policy

However,  questions have arised about the adequacy of Zimbabwe’s reserves to back the new currency, especially considering the volatility of gold prices. The central bank, consequently, has outlined its reserves, which include gold and precious minerals, to provide a threefold cover for the ZiG’s issuance. A tight monetary policy, moreover,  is planned, linking money supply growth to the growth in gold and foreign exchange reserves.

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