Zimbabwe has become well-known for its hyperinflation and record currency failures. At some point, inflation soared to over 100 trillion as the central bank, ordered by President Mugabe, printed tons of money to fund the budget. It has launched six currencies, which have failed, leading to a lack of confidence among residents and businesses.
ZiG is a major experiment
Zimbabwe launched the RTGS Zimbabwe dollar in 2019. As with the other currencies before that, it collapsed this year, pushing officials to find another alternative.
That alternative came in the form of the Zimbabwe Gold, popularly known as the ZiG. It is a big experiment that has a close resemblance to a stablecoin. That’s because, unlike the other Zimbabwe currencies, it is backed by 2.5 tons of gold and over $100 million in US dollars. At the current rate, the gold holdings are worth over $188 million.
ZiG is also a big experiment because it is the only currency of its kind globally. The closest comparison would be the US dollar before President Richard Nixon ended the gold standard in a bid to fight inflation.
The other notable comparisons are countries like Bahrain, Jordan, and Hong Kong that have pegged their currencies to the US dollar. By so doing, their currencies are usually stable, which promotes international trade.
Will the ZiG currency work?
It is too soon to predict whether the Zimbabwe ZiG will work out. However, I believe that there are a few red flags to be aware of.
First, there are signs that the official and the black market USD to ZiG exchange rates are diverging. According to the central bank, the official rate stands at about 13.4 while traders in the black market are exchanging it for about 17.
As a result, the government has ramped up arrests for street traders whom it accuses of manipulating the currency. Historically, the impact of such enforcement tends to be short-lived.
Second, most people in Zimbabwe have lost their savings to inflation using the past currencies. As such, it is unclear whether anyone will want to save their money using this new experiment. Instead, most Zimbabweans will always prefer to use the US dollar. Most businesses already use the US dollar in their business.
Third, it is unclear whether the ZiG currency in circulation is adequate for the Zimbabwean economy. ZiG is backed by less than $300 million in assets, which is less compared to an economy with a GDP of over $22 billion.
Historically, places like Hong Kong spend billions of dollars to back their currencies in periods of strain. For example, the HKMA spent H$293 million to defend its HKD between January and May 2023 as the property market faltered. It is unclear whether Zimbabwe has the gold and dollar resources it needs to defend the currency.
