Zimbabwe ZiG, the country’s sixth effort to a stable currency, has continued its downward trend amid a deteriorating economy and confidence issues. The official USD to ZIG exchange rate rose to 28, higher than its starting price of 13.5.
It has risen to 40 in the unofficial market even after the ruling party passed a resolution to adopt the currency as the sole legal tender and phase out the use of the Greenback. Some black-market traders were quoting it at 50.
What is the Zimbabwe ZiG
Zimbabwe’s central bank launched the ZiG, whose code name is ZWL, in April as it sought to create a stable exchange rate. This launch happened after the then currency, which was known as the Real Time Gross Settlement (RTGS) dollar, crashed by 80% in the first three months of the year.
The Zimbabwe ZiG was initially backed by 2.5 tons of gold and $100 million in cash, whose value has now grown to over $375 million. After the launch, Zimbabwe converted all assets, including stocks, to the new currency.
The currency was a big success in its final months as it maintained its stability against the US dollar and other currencies. This stability led to a stable inflation rate and praise from the World Bank.
The initial stability also happened because of its scarcity and the efforts by the government to crackdown on the black market.
It then came crashing down in September when the central bank decided to devalue the currency by 40% in a bid to bridge the gap between the official and unofficial rates.
The Zimbabwe ZiG has also crashed because of the weakening economy caused by a prolonged drought.
Most importantly, the currency has imploded because of the lack of confidence among Zimbabwean residents and businesses, who have suffered from the last currency implosions. Besides, the current leaders, including ministers and central bank officials, have been in power for decades.
Additionally, Zimbabwe is mostly a US dollar country, with the greenback accounting for over 80% of all transactions.
Read more: USD to ZiG: Zimbabwe Gold Currency is Holding Well; Risks Remain
Would stablecoins be a better alternative?
The Zimbabwe ZiG crash happened even as the price of gold has jumped to a record high, which in theory, would make it more valuable. Gold soared to an all-time high of $2,790 last week, and has jumped by almost 40% this year.
Some analysts believe that Zimbabwe should instead create its own stablecoin like Tether, which has become a $120 billion asset.
A stablecoin is a currency that is backed 1:1 by another currency, such as the US dollar. Unlike the ZiG, which cannot be converted into gold or the US dollar, a stablecoin would be easy to convert.
The challenge, however, is that the government does not have enough reserves to back the stablecoin and fund the budget.
Countries that have succeeded in having pegged countries have vast dollar reserves, which helps the central bank to intervene in the market. For example, Hong Kong, whose HKD is backed by the US dollar has over $422 billion in reserves. Similarly, Bahrain has over $4.1 billion in reserves.
Therefore, the most likely solution for Zimbabwe is to continue using the US dollar as it has done in the past few years.
Read more: Zimbabwe ZiG Hits Record Low as Interest in Tether (USDT) Rises
