The recently launched Zimbabwe ZiG continued its downward trend this month as concerns about the economy rose. The official USD to ZIG exchange rate started the month at 13.86 and has risen to 13.95, a 0.65% increase. It has risen by over 4.81% since its inception in April.
The black market rate has been worse. According to ZimPriceCheck, 1 USD to ZiG ranges from 18 to 26, meaning that it has dropped by almost 100% since its launch in April. Here are a few reasons why the Zimbabwe ZiG faces major headwinds ahead.
Consumer and business confidence is still low
The main reason why the Zimbabwe ZiG faces major risks ahead is that consumers and businesses still lack confidence in the local currency.
Many of these people have lost substantial purchasing power betting on the local currency in the past few decades.
The first one was the collapse of the Zimbabwe dollar a few years ago that pushed hyperinflation to record highs. This happened as the Robert Mugabe government printed cash to fund its budget.
A few years ago, the government launched a gold-backed currency followed by the recent RTGS Zimbabwe dollar. The latter collapsed by more than 80% in the first few months of the year.
When a currency implodes, people who have saved in it see their savings disappear. For example, assume that you had 1 million Zimbabwe dollar when it was trading at 100 to the US dollar. In this case, you had $10,000. However, when it moved to 200, it means that you have $5,000.
Therefore, it will be difficult to convince Zimbabweans to make their savings in the new currency. The same applies to people in countries like Turkey, Egypt, and Nigeria.
Zimbabwe’s economy is not doing well
Meanwhile, the Zimbabwe’s economy is not doing well, as the country deals with the impact of a recent prolonged drought.
The drought has led to a substantial crisis, which has pushed the government to announce a radical policy to kill 200 elephants to feed the population.
Zimbabwe has also been forced to import food from other countries, leading to more US dollar demand. Also, there is a risk that the important tobacco crop will fail this year, leading to less dollar inflows.
On the positive sign, Zimbabwe is benefiting from the ongoing gold surge, which pushed it to its all-tme high this week. Federal Reserve interest rate cuts will help to push it higher for a while.
This is notable since Zimbabwe is one of the top gold producers globally. It produced over 37,355 kilograms in 2022, a figure that has likely risen.
A recent report showed that foreign currency receipts rose by 10% in the first half of the year because of gold and remittances.Other commodities like nickel and lithium have risen slightly in the past few weeks.
Zimbabwe dollar reliance
The Zimbabwe ZiG will likely face pressure because the country is mostly a dollar economy. Most companies, shops, and even small businesses mostly deal with the US dollar. In most cases, those that accept the ZiG convert their cash to US dollar afterwards.
Data by the Zimbabwe Central Bank shows that over 60% of all transactions are in US dollar, and this trend will likely continue.
Zimbabwe’s central bank hopes to fully transition to the ZiG in 2030 while the government expects the move to happen soon.
While these government measures will lead to more ZiG usage, in the long term, more people in the country will move to the US dollar. Just last week, the central bank governor warned that he would double efforts to tame the currency’s saboteurs.,
Untested experiment
The other reason why the Zimbabwe ZiG faces a tough future ahead is that it is an untested experiment.
For starters, the Zimbabwe ZiG achieves its value by being backed by US dollars and gold reserves. The central bank hopes to continue adding into these reserves while the government has hinted that it will not order more currency printing to fund the budget.
The reality, however, is that the Zimbabwe ZiG is an untested experiment that no other countries have done in the past.
Instead, many countries directly back their currencies to other major ones. In the South African region, countries like Namibia and Eswatini have backed their currencies to the South African rand. The Hong Kong dollar is pegged to the US dollar.
To ensure stability, these central banks often intervene in the forex market, especially when there is strong dollar demand. It is unclear whether Zimbabwe’s central bank has the resources it needs to do these interventions. Recent reporting by Bloomberg shows that the central bank has injected $190 million in the forex market to meet demand for dollars.
The post USD to ZiG: Here’s why the Zimbabwe currency is melting away appeared first on Invezz