Zimbabwe introduces new currency

Henry

Zimbabwe’s central bank on Friday introduced a new “structured currency” backed by gold in an effort to tackle sky-high inflation and stabilize the country’s struggling economy.

The ZiG, which stands for Zimbabwe Gold, will replace the Zimbabwean dollar which has had almost no value for several years – and inflation is also going through the roof – said John Mushayavanhu, Governor of the Reserve Bank.

“Banks will convert existing Zimbabwe dollars to the new currency from today,” he said during a monetary policy statement on Friday.

He also announced a drastic reduction in the bank’s main interest rate, from 130% to 20%.

The ZiG will be “fully anchored and fully backed” by reserves consisting of foreign exchange and precious metals, mainly gold, Mushayavanhu added.

“The move is aimed at promoting ‘simplicity, certainty and predictability’ in Zimbabwe’s financial affairs.”

The new banknotes range from 1 to 200 ZiG.

The Zimbabwe dollar has lost almost 100% of its value against the US dollar in the past year.

According to Zim Price Check, the Zimbabwean dollar officially traded at around 30,000 to the US dollar on Friday, and at 40,000 on the black market.

Official data shows that the currency has contributed to Zimbabwe’s high inflation rate, which – after climbing well into the triple digits last year – reached 55% in March.

This has put enormous pressure on the country’s 16 million citizens, who are already facing widespread poverty, high unemployment and severe drought.

Need more gold?

Mushayavanhu says Zimbabweans have 21 days to convert their old cash to the new unit.

The new banknotes contain a drawing of gold blocks being minted, as well as Zimbabwe’s famous Balancing Rocks, which already appeared on the old ones.

Zimbabwe boasts large gold deposits. The precious metal was responsible for almost 25% of Zimbabwe’s exports in January.

Nevertheless, analysts are unsure whether Harare has enough reserves to adequately support the currency, or whether the currency could suffer from volatility in gold prices.

Pres. On Thursday, Emmerson Mnangagwa inspected the central bank’s vaults, which according to Mushayavanhu, who was appointed earlier this year, contained 1.1 tonnes of solid gold.

The bank also has nearly 1.5 tons abroad, as well as $100 million in cash and precious minerals such as diamonds that, if converted into gold, would account for another 0.4 tons, he added.

In total, the reserves’ value amounts to $285 million, which according to Mushayavanhu “will cover the ZiG currency that is issued more than three times”.

However, some people are skeptical.

“Of course we need more,” said economist Prosper Chitambara, adding that other countries such as South Africa have much larger reserves.

“The more reserves, the more confidence and the greater your ability to protect your currency against any unexpected events.”

The central bank says it will establish a strict monetary policy that will link growth in the money supply to growth in gold and foreign exchange reserves.

Rising prices brought back memories of 2008, when hyperinflation was so out of control that the central bank even issued a 100 billion dollar note, which is now a collector’s item.

The government was eventually forced to abandon the local currency and accept the US dollar as legal tender.

The Zimbabwean dollar revived in 2019, but suffered from the same problems.

Most Zimbabweans prefer to do business, get paid and keep their savings in US dollars.

Many who earn a salary in local currency rush to currency exchange shops on payday.

The government has previously used various measures to stabilize the economy, including the issuance of gold coins and the introduction of a gold-backed digital currency. However, this produced few results.