Zimbabwe Introduces Gold-Backed ZiG Currency Amid Economic Challenges

Zimbabwe introduces the Zimbabwe Gold (ZiG) currency, backed by gold and precious metals, with an official exchange rate of 13.5 ZiG per US dollar. The government imposes fines on businesses using inflated rates, aiming to maintain the currency's value and attract foreign investors.

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Zimbabwe Introduces Gold-Backed ZiG Currency Amid Economic Challenges

Zimbabwe Introduces Gold-Backed ZiG Currency Amid Economic Challenges

On April 8, 2024, Zimbabwe introduced the Zimbabwe Gold (ZiG) currency, backed bygold and precious metals, becoming the only country to return to the gold standard. The move has sparked debate on its potential impact on economic growth and financial stability as the government struggles to maintain the value of the new currency.

Why this matters: The success or failure of Zimbabwe's gold-backed currency could have far-reaching implications for the global economy, as it tests the viability of alternative monetary systems. If successful, it could inspire other countries to explore similar options, potentially reshaping the international financial landscape.

The government has set an official exchange rate of 13.5 ZiG per U.S. dollar and imposed fines on businesses using inflated rates. Enterprises using an exchange rate above the official rate will face a penalty of 200,000 ZiG ($14,815). Vice President Constantino Chiwenga stated that linking the ZiG to gold reduces the risk of volatility and manipulation, and authorities expect this will bring stability to foreign exchange markets.

The ZiG replaces the Zimbabwean dollar, which lost approximately 80% of its value against the US dollar this year, making budgeting increasingly difficult. The central bank has vowed not to print any more bills unless it can back them with reserves and plans to publish annual data to prove it's keeping its word. The government has also launched a crackdown on illicit foreign currency dealers and is converting its annual budget to the ZiG.

However, analysts are reserving judgment, citing the government's history of printing money to finance spending, which led to hyperinflation and economic woes in the past. Hasnain Malik, head of equity strategy research at Tellimer in Dubai, stated, "The ZiG on its own is not a prompt for foreign investors to commit fresh capital to Zimbabwe. For that, they need to see the build-up of hard currency reserves and a track record for easy convertibility and repatriation." Local businesses threaten to sue RBZ

Zimbabwe has been locked out of capital markets since 1999 for defaulting on its debt and needs to clear billions of dollars in arrears with creditors, including the World Bank, European Investment Bank, and Paris Club. Policy uncertainty remains a major concern for investors, who need time to understand the direct impact of the ZiG on their investments.

To attract foreign investors, Zimbabwe kicked off an international roadshow in Johannesburg, with upcoming visits planned for London (June 10-13) and Dubai. The country has set up the Zimbabwe Investment and Development Agency as a one-stop shop to attract suitors, with China, India, Pakistan, and South Africa already showing interest.

The introduction of the ZiG marks Zimbabwe's sixth attempt since 2008 to establish a stable domestic currency. While the gold-backed unit offers a potential solution to the nation's economic challenges, its success will depend on the government's ability to maintain the value of the ZiG, build up hard currency reserves, and provide a track record of easy convertibility and repatriation for investors. As Valentine Garacho, co-founder of Zerttew Global, noted, "Ultimately, what investors want to be clear about is the security of their investment." Zimbabwe will fine businesses using inflated exchange rates