Currency In Chaotic Turmoil
The current steep decline of Zimbabwe’s beleaguered currency, ZiG, and its edging towards freefall and looming collapse will have disastrous consequences Zimbabwe’s economy, including stoking the already stratospheric inflation, reducing purchasing power, and undermining investor confidence.
Zimbabwe has the worst performing currency and the highest inflation (858%) in the world, making it an economic disaster.
ZiG has been going through gradually decline, now its in sharp decline, approaching freefall and collapse stages.In a bid to rescue the much-hyped currency – which it claims is gold-backed and supported by hundreds of millions in foreign exchange – monetary authorities yesterday intervened with an array of urgent policy measures and tools, officially devaluing the local currency by 42.6% to close the parallel market exchange rate premium and narrow arbitrage.
This drastic devaluation of the “gold-backed” ZiG is a clear indication that the currency is in big trouble even though bullion prices have been stable.
Market, currency and exchange rate volatility have returned with a vengeance, fueling inflation and threatening to drive more companies to closure; worsening the already grim economic situation.
A day before devaluation, that is on 26 September 2024, the exchange rate was officially US$1: 13.9987.
Yesterday, the rate was US$1:24.3902 officially.
It remains there today.
In the black market, the rate is still rising, climbing above US$1:ZiG30, and it is further pulling away.
After devaluation, ZiG lost value by 42.605%, while the United States dollar had appreciated in value by 74.232%.
Currency devaluation is a policy by a country’s government to weaken the value of its currency.
Currency depreciation is a fall in the value of a currency in terms of its exchange rate compared to other currencies.
It occurs due to factors such as economic fundamentals, interest rate differentials, political instability, or risk aversion among investors.
Independent economists say by yesterday ZiG had already lost massive value by 49%, inching towards a freefall and collapse.
These developments came as currency volatility, exchange rate instability and inflation were intensifying.
Authorities yesterday did not explain what has happened to their claim that the currency is gold-backed and was supported foreign exchange reserves.
When ZiG was launched on 5 April, Reserve Bank of Zimbabwe governor John Mushayavanhu and government officials claimed the currency was backed by 1.1 tonnes of gold at home, 1.5 tonnes of bullion abroad and US$100 million in cash and precious minerals.
In total, Mushayavanhu said the reserves amounted to US$285 million, which he added that was “more than three times the cover for the ZiG currency being issued”.
However, the governor and his officials yesterday scrambled to tighten money supply, raising the bank rate policy (interest rates) from 20% to 35% and statutory reserve requirements for demand and call deposits for both local and foreign currency deposits from 15% and 20%, respectively to 30%.
They did not explain what happened to the gold and foreign exchange reserves they spent weeks on end from April hyping and waxing lyrical about.
Mushayavanhu said the new measures by the RBZ’s Monetary Policy Committee are designed to achieve the following objectives:
“To ensure that inflation expectations remain well anchored as well as dissipate current inflationary pressures, the MPC has made the following resolutions:
“To increase the Bank Policy rate from 20% to 35% with immediate effect.
To increase and standardixe the statutory reserve requirements for demand and call deposits for both local and foreign currency deposits from 15% and 20%, respectively to 30%.
The statutory reserve requirements for savings and time deposits for both localand foreign currency have also been increased from 5% to 15%, with immediate effect.
“To allow greater exchange rate flexibility, in line with the increased demand for foreigncurrency in the economy.
To reduce the amount of foreign exchange an individual can take out of the country, from US$10 000 to US$2 000
“The MPC is convinced that the above measures will go a long way in addressing the emergingexchange rate risks, anchor the inflation expectations and stabilise prices in the near to short term.
Going forward, the MPC will remain vigilant to any emerging risks to ensure continued macroeconomic stability.”
Zimbabwe’s new currency is facing dangerous headwinds.
Launched on 5 April 2024, ZiG was initially pegged at 13.56 to the US dollar, but its value has now plummeted by 42.6% to 24 per US dollar after devaluation.
ZiG replaced the old and defunct Zimbabwean dollar, which had lost 80% of its value since the start of the year amid crippling volatility and exchange rate-driven inflation.
There have been various versions of the Zimbabwean dollar since 1980: Zimdollar, bearer’s cheques, bond notes and now ZiG.
The continued collapse of the local currency forced government to introduce the multi-currency system which is in operation amid uncertainty.
Last year, government extended the use of the multiple currency system to December 2030, which went a long way in putting to rest the anxiety by businesses and potential investors over the country’s chaotic currency regime.
Although ZiG is purportedly gold-backed, it has been ravaged by market volatility and economic turmoil, becoming one of the worst versions of the Zimbabwean dollar yet.
ZiG’s collapse has significant implications for Zimbabwe’s economy, including stoking inflation, reduced purchasing power, and decreased investor confidence.
To address these challenges, the government may need to reassess its monetary policy and implement measures to stabilise the currency.
However, the power of monetary policy to change money supply and influence interest rates and the exchange rates (and from these, inflation, output, or other variables) rests on the downward slope of the demand side.
