USD to ZiG: As the Zimbabwe ZiG plunges, what next?

    The Zimbabwe ZiG currency continued its downward trend this week, raising concerns about the need for interventions by the central bank. Data published on the central bank’s website shows that the USD to ZiG exchange rate was trading at 13.74, about 1% higher than its April’s open.

    Zimbabwe ZiG retreat continues

    The Zimbabwe ZiG currency has retreated at a time when most currencies are gaining against the US dollar after last week’s US jobs numbers.

    These numbers revealed that the economy created over 207k jobs in June while the unemployment rate rose to 4.1%. As a result, the US dollar index has tumbled as investors predict that the Fed will start to cut interest rates as soon as in its September meeting. 

    The currency also continued falling after it was praised by a team by the International Monetary Fund (IMF) who visited the country recently. They hailed the currency for introducing a bout of stability in the country and helping it to moderate inflation. The statement said:

    “The ZiG official exchange rate has so far remained stable, ending a bout of macroeconomic instability in the first three months of the year. Assuming that macro-stabilization is sustained, cumulative inflation in the remainder of the year is projected at about 7%.”

    At the same time, the Zimbabwe Central Bank has ruled out against intervening in the forex market to prevent further downwards. In a recent statement, Innocent Matshe, the bank’s deputy governor said that the decline was normal and predicted that the currency would bounce back in due time. 

    Zimbabwe ZiG faces uncertainty in the future

    The new Zimbabwe currency has done well since its launch in April this year. For starters, this currency is backed by 2.5 tons of gold and $100 million in cash. The central bank hopes that it will continue adding into its gold reserves as the mining process continues. 

    Its recent stability has happened because it is backed by relatively stable assets. It has also happened as the central bank continued to enforce its battle against street traders, who were blamed for the collapse of the other six currencies.

    The government now hopes to accelerate the usage of the currency as the only legal tender within two years. Such a move will put the risk the popular usage of US dollars ahead of the 2030 deadline.

    The US dollar has become the most popular currency in Zimbabwe, accounting for over 80% of total transactions. It is so popular that the statistics agency releases two inflation numbers: one in USD and the other in the local currency. 

    Despite the progress, analysts are cautious about the future of the Zimbabwe ZiG. Besides, most of these analysts and users have seen other currencies launched with a lot of fanfare only to collapse within a few years.

    Just recently, the central bank launched the RTGS Zimbabwe dollar in 2019 only for it to implode earlier this year. 

    Zimbabwe also faces some macro risks that could affect the economy and dollar inflows. Its agricultural output is expected to be low this year because of the recent el-nino event. Also, some of its top commodities have struggled this year, which could affect inflows of dollars. 

    The other concern is whether the government will move back to its older ways of printing money to support the budget. The government has ruled out doing that but analysts believe that it could be just a matter of time. A key challenge will be how to ensure its stability in the long term. Historically, places like Hong Kong have found it expensive to maintain a currency peg. The US also found it difficult to maintain the US dollar peg in the 1970s.

    The post USD to ZiG: As the Zimbabwe ZiG plunges, what next? appeared first on Invezz

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