Devaluation fails to halt ZiG free-fall

Zimbabwe's new local currency, the Zimbabwe Gold (ZiG), has taken another hit, losing an additional 11% of its value in under a month following a substantial 43% "devaluation" announced by monetary authorities. Despite Central Bank Governor Dr. John Mushayavanhu's statement that the sharp adjustment to ZiG was a "once-off" measure intended to stabilize the currency, ZiG has continued to slide, raising concerns about its stability.

The official devaluation, which took effect on September 27, saw the currency's value adjusted from ZiG14 to ZiG24.39 against the US dollar. However, as of October, ZiG had depreciated further to ZiG27.44, with even higher rates of ZiG35–ZiG40 per dollar being quoted on the parallel market. This disparity has created challenges for businesses and households relying on the currency, particularly with October inflation figures expected to remain high as a result.

Expert Concerns: Impact on Business and Consumer Confidence

Economists have warned that continued depreciation of ZiG risks undermining confidence in the currency as a reliable store of value and deterring investment. Jonathan Munemo, a professor of economics at Salisbury University, wrote in Moneyweb that currency instability not only disrupts economic activity but also creates uncertainty for foreign investors. He pointed out that reliance on devaluations without addressing underlying fiscal issues could have severe repercussions on economic growth and consumption.

"Authorities must confront the fundamental causes, rooted in a loss of faith in the ability of the Government to manage spending," Munemo said, adding that budget overspending, excessive printing of currency, and failure to stimulate economic growth have worsened the situation.

Calls for Structural Reforms

Analysts argue that without a stable currency, inflation expectations will remain high, creating a cycle of depreciation. Farai Mutambanengwe, CEO of the Small Enterprises Association of Zimbabwe (SMEAZ), expressed concerns that the ZiG lacks essential characteristics of money, such as serving as a stable store of value and a consistent medium of exchange. This fundamental issue, he noted, has led to ongoing rejection of ZiG within the market.

Kudakwashe Mugova, another economic analyst, added that the recent devaluation signals that the official exchange rate is not market-driven, contributing to inflation expectations and increasing reliance on the parallel market rate. He emphasized the need to reduce government spending on non-essential projects to relieve pressure on forex reserves, suggesting a focus on projects that are essential for economic stability.

Broadening Dialogue on ZiG's Viability

The lack of public confidence in ZiG has prompted calls for greater transparency and inclusivity in managing the currency. Walter Mandeya, an analyst from Trigrams Investments, urged the Reserve Bank of Zimbabwe (RBZ) and the Monetary Policy Committee to take a more consultative approach, emphasizing the importance of public trust and institutional integrity in managing a stable currency.

"We need the ZiG to succeed. We need the Governor to succeed," Mandeya noted. "That means we have to come together and ask those difficult questions like, ‘What exactly is the ZiG? Why is it continually depreciating?'"

Recommendations for Stabilizing ZiG

To address Zimbabwe's currency challenges, Munemo recommended that authorities focus on comprehensive fiscal reform, redirecting spending toward critical areas such as health, education, and public infrastructure. Additionally, policies to curb corruption and enhance governance could restore public confidence and reduce the need to finance deficits by expanding the money supply.

"Reforms should aim to capture more revenue, expand tax bases, and impose the fiscal discipline necessary to restore faith in government institutions," Munemo said. "Pursuing credible policies for sustainable growth can offer the government more room to address essential needs without fueling inflation."

As Zimbabwe's economy grapples with the challenges surrounding ZiG, the government's ability to implement these recommendations will be key to stabilizing the currency and sustaining economic growth.