Zimbabwe early this month announced the introduction of a new currency, Zimbabwe Gold, after several years under the multi-currency system, demonstrating the latest effort to combat debilitating inflation. ZiG for short, the new structured currency is the nation’s latest departure from the Zimbabwe dollar, which by the introduction of ZiG was in its fifth series. The announcement of the currency change came after the Zimbabwe dollar lost more than 70 percent of its value in the first three months of 2024, with the price of a single loaf of bread skyrocketing from Z$6,105 to Z$19,357 in 11 weeks.
So, What Exactly is ZiG?
ZiG refers to Zimbabwe’s latest currency, currently only available as digital tokens backed by gold and a ‘basket of precious minerals.’ According to the Zimbabwe Reserve Bank, ZiG banknotes and coins are to be rolled out at the end of the month when the nation’s old currency –$ZWL–will cease to be legal.
Already, the introduction of ZiG has caused panic, with citizens unable to transact via bank cards, online money platforms, internet banking, and phone banking for seven days after ZiG’s introduction. As a result, authorities arrested hundreds of money-changers in the nation’s capital and surrounding cities, accusing them of trading the ZiG at 20 ZiG to 1 USD; far higher than the set exchange rate of 13.56 ZiG to 1 USD.
The Zimbabwean government has arrested 65 illegal money changers after the new currency, called the ZiG, lost 47.4% of its value on the black market in less than two weeks of being introduced on April the 8th.
The ZiG is pegged at 13.56 to the US Dollar, but it has crashed and… pic.twitter.com/dEgWidzWVw
— Hopewell Chin’ono (@daddyhope) April 20, 2024
Reporting by the VOA on April 20th claimed, “Zim authorities responded swiftly to the recent decline in the new gold-back currency by apprehending illicit money changers and closing the bank accounts of businesses accused of exclusively dealing in US dollars.”
The confusion continues, however, with the Reserve Bank stating in its 2024 Monetary Policy that ‘statutory instrument 218 of 2023 restored the use of multi-currency in the settlement of any transactions until December 2030.’ The policy stated, ‘in order to foster demand for the new currency, businesses must settle at least 50 percent of their tax obligations in ZiG,’ but only on quarterly payment dates, with the second quarterly payment due only on June 25th.
The seemingly arbitrary response from the government has, as in the past, spurred mistrust between the public and the new currency. Since the currency’s introduction on April 5th, the Zimbabwe Stock Exchange All Share Index fell 99.95 percent.
In response, Justin Bgoni, CEO of the Zimbabwe Stock Exchange, claimed that the long time it took for lenders to convert to ZiG and tight liquidity conditions–a shortage of money in the financial system–led to the drop, without acknowledging the week-long outage experienced by the nation’s banks.
Additionally, the nation’s Reserve Bank Governor Dr. John Mushayavanhu and Finance Minister Mthuli Ncube were summoned by Parliament to explain the implications of the currency changeover. Neither the Governor nor Minister Ncube showed up.
Further complicating things is the need to inform those living in rural areas–which accounts for 67 percent of Zimbabwe’s population–of the new currency. In a document released by the Zimbabwean Reserve Bank titled, ‘Questions and Answers on the Structured Currency,’ the Bank states it will “embark on educational and awareness roadshows through widespread media platforms to reach out to all corners of the country and ensure that people in the rural areas are not left behind.”
However, according to 2021 World Bank data, just 31.6 percent of Zimbabwe’s rural population has access to electricity, drumming up questions over how effective the Reserve Bank’s educational roadshows will be.
A Gold-Backed Currency?
Through the introduction of ZiG, Zimbabwe will be the only country in the world to currently have a gold-backed currency.
The United States departed from the gold standard in 1971, while the last currency backed by gold was the Swiss Franc, which converted the Franc to fiat money in 2000.
‘Fiat money’ refers to money that is a government-issued currency and that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it.
Thus, fiat money is susceptible to inflation, particularly if the citizens of a nation lose faith in the stability of the currency, as seen in various periods throughout Zimbabwe’s history. An informal economy, which operates alongside the formal economy, has traditionally been Zimbabwe’s saving grace in periods of economic turmoil, specifically since the introduction of the multi-currency system; as citizens are able to trade in the informal economy in the currency of their choice when the local currency drops in value.
Conversely, a gold-backed currency hedges against inflation due to governments being unable to ‘print’ more of it in the way they can with money. Additionally, as a precious metal, gold holds intrinsic value.
In its 2024 Monetary Policy, the Reserve Bank states, “ZiG shall at all times be anchored and fully backed by a composite basket of reserves comprising foreign currency and precious metals (mainly gold), received by the Reserve Bank as part of in-kind royalties and kept in the vaults of the Bank. Foreign currency balances will be accumulated through market purchases from the 25 percent surrender requirements as well as the sale of some precious metals received as royalties.”
“As at 5 April 2024, the Bank’s reserve asset holdings comprise of USD 100 million in cash and 2,522 kg of gold (worth US$185 million) to back the entire local currency component of reserve money which currently stands at ZW$2.6 trillion requiring full (100 percent) cover of gold and cash reserves amounting to US$90 million. The total amount of gold and cash reserve holdings of US$285 million represents more than 3 times cover for the ZiG currency being issued.”
In all senses, Zimbabwe’s shift to ZiG should have been a welcome change, so why did the Stock Exchange Share Index drop 99.95 percent upon ZiG’s introduction?
Does Debt-Ridden Zimbabwe Actually Have The Gold it Says it Does?
Zimbabwe was once known as the ‘breadbasket’ of Africa due to its vast natural resources and high agricultural output. However, various ZANU-PF policies have isolated the nation, brought famine upon its people, and emptied the coffers of the country’s financial institutions to such a degree that it is currently in arrears with the African Development Bank (AFDB), European Investment Bank, and the World Bank.
According to the AFDB, “Zimbabwe’s total consolidated debt amounts to US$17.5 billion. Debt owed to international creditors stands at US$14.04 billion, while domestic debt comes to US$3.4 billion. Debt owed to bilateral creditors is estimated at US$5.75 billion, while debt to multilateral creditors is estimated at US$2.5 billion.”
Ben Bernanke, Former Chairman of the United State’s Federal Reserve Bank, illustrated four fundamental problems with the gold standard in a 2012 lecture titled the ‘Origins and Mission of the Federal Reserve.’
Zimbabwe faces one of those four fundamental problems with ZiG, ‘since prices are tied to the amount of money in the economy, which is linked to the supply of gold, inflation depends on the rate that gold is mined.’
Zimbabwe, designated a country abundant in natural resources by the World Bank, has an estimated 30 million tons of gold in situ (in the natural or original position or place), but in recent years gold production has dropped.
According to statistics from the United State’s International Trade Administration, Zimbabwe’s gold production peaked in 2022 at 37.3 tons but dropped 15 percent in 2023 to just 30 tons. Currency fluctuations and massive power outages were blamed for the drop, with the nation’s three power plants which generate a total of 1200 megawatts of power unable to keep up with the nation’s peak electricity demand of 1850 megawatts.
Additionally, the Trade Administration identified smuggling as one of the main challenges facing Zimbabwe’s gold industry, with Al Jazeera’s investigative unit uncovering the existence of multiple smuggling gangs ferrying Zimbabwean gold to Dubai. Once in Dubai, the investigative unit learned that Zimbabwean gold was refined and shipped to London or Switzerland, where it would receive a ‘Swiss gold’ stamp.
Further confirming a smuggling problem is the 2020 conviction of Henrietta Rushwaya, a traditional (non-blood related) relative of President Mnangagwa, for attempting to smuggle $330,000 worth of gold bars to Dubai. At the time of her conviction, Rushwaya was the President of the Zimbabwe Miners Federation.
Zimbabwean gold smugglers are tightly linked to Zimbabwe’s political elite, enabling them to evade sanctions by laundering money through international gold transactions. Currently, the United States has 11 members of Zimbabwe’s political and business elite on its sanctions list, including President Mnangagwa and the Deputy Director-General of Zimbabwe’s Central Intelligence Organization, Walter Tapfumaneyi.
The sanctions were placed due to the individuals’ roles in “continuing corruption and serious human rights abuses in the country.” President Mnangagwa’s role in corruption raises further questions about the Reserve Bank’s gold stores.
The independence of the reserve bank is questionable, despite it stating, “The Bank has both operational and instrument independence through its Board of Directors and Monetary Policy Committee.”
“The Board provides the necessary oversight while the MPC is empowered to formulate and prescribe policies independently. The Bank is also protected against interferences by the provisions of the RBZ Act.”
However, the Governor of the Reserve Bank and his two Deputies are appointed by the President and, as stated by section 19 of the Reserve Bank Act, ‘requires him [the Governor] in the exercise of his duties to be subject inter alia to the policy direction of the Minister of Finance,’ with the Minister of Finance also appointed by the President.
What’s more is the fact that the President appoints the Board of the Reserve Bank.
Thus, through a policy of appointment, the President and his party– the ZANU-PF–are able to maintain a tight grip on Zimbabwe’s financial institutions. This method of power consolidation has made Zimbabwe undesirable to international investors, further worsening its economic situation.
How well ZiG will hold as the nation’s currency is yet to be determined. However, the Stock Market Exchange All Share Index dropping as much as it did signals a general weariness among the population over the government’s latest currency redenomination. Corruption, flawed democratic practices, wide-scale poverty, and hunger have created an environment of mistrust between the government and the people in Zimbabwe, with the informal economy and foreign currency often a civilian’s only lifeline when the nation’s economic situation takes a turn for the worse.