Will the new Zimbabwe ZiG survive where the Zim do...

Will the new Zimbabwe ZiG survive where the Zim dollar failed?

Crispus Nyaga

Innvez - Zimbabwe, the country made popular by its hyperinflation, is making another attempt to solve its currency crisis.

In a statement on Friday, the central bank announced that it was launching ZiG, a new currency backed by gold. This is the bank’s sixth attempt to save its currency as the Zimbabwe dollar has plunged by over 75% this year.

The government aims that the new currency will help to stabilise an economy that is being battered by high levels of inflation. In a statement, the government said that all companies will be required to settle their tax obligations using the new currency.

As for now, Zimbabwe ZiG is backed by about US$100 million in cash and 2 522 kilogrammes of gold valued at US$185 million. These amounts are three times the amount of ZiG currency being unveiled.

Still, I have concerns about whether the currency will succeed in the long term. For one, while Zimbabwe uses the ZIM dollar, the reality is that the economy is mostly dollarised. Most of the transactions in the country are handled using the US dollar.

Further, most people and companies have been burnt by holding the different variations of the Zimbabwe dollar over the years. Once bitten, twice shy. This means that most people will not take a risk with the new experiment.

Third, Zimbabwe is the only country in the world to have a gold-backed currency. The US ended the experiment in early 1970s when President Richard Nixon moved from the gold standard and moved to a floating rate. Therefore, most people will not prefer to participate in this experiment.

Fourth, it is unclear whether Zimbabwe has the necessary amount of gold needed to back its currency. In a note, an analyst told the Financial Times:

“Zimbabwe has less than a month of reserves, not enough to defend the structured currency. A new currency every five years now seems the norm.”

Therefore, there is a likelihood that the new ZiG currency will not last in the long term. Analysts believe that the only solution for Zimbabwe is just embracing the US dollar as the official currency in the country. Besides, it is already used in over 80% of transactions.