The official Zimbabwe ZiG currency has held quite well this month even as the country’s economy has deteriorated recently. Data on the central bank’s website shows that the USD to ZiG exchange rate was trading at 13.82 on Monday, a few points above 13.79 where it started the month at.
Similarly, the ZAR to ZiG was trading at 1.2854, down from 1.3250, where it started the month while the GBP/ZiG was at 18.24. Still, the Zimbabwe ZiG is higher than where it started trading at in April this year even as the US dollar index (DXY) has plunged to its lowest point this year.
Additionally, the Zimbabwe ZiG has also dropped sharply in the black market, a sector that the central bank is battling. Data by ZimPriceCheck shows that the USD to ZiG in the informal sector was trading as high as 24.
Zimbabwe economic challenges remain
Zimbabwe’s economic challenges continued this month, according to the official statistics by the government.
For example, there are signs that Zimbabwe’s inflation has started rising again as the cost of food remained at an elevated level because of the recent drought. Data by the statistics agency showed that the headline Consumer Price Index (CPI) rose 1.4% in August after falling by 0.1% in the previous month. That was the biggest inflation read since the country started using ZiG to compute its prices in May.
Food has become the biggest contributor to the country’s inflation as the country continues going through a major drought, which analysts attribute to climate change.
This drought has led to a major food shortage in Zimbabwe and the United Nations has asked for $400 million to help deal with the situation.
At the same time, the drought has led to more demand for foreign currency as the country continues importing food products like wheat and corn.
The drought will also lead to fewer dollars because of the expected weak tobacco harvest. Tobacco is one of Zimbabwe’s biggest export commodities.
Zimbabwe is not the only African country going through a major drought. Zambia, a country that has historically exported food, has also started importing corn and other products, leading to a severe decline of the Zambian kwacha. Other countries like Namibia, Botswana, and Mozambique are also going through a drought because of El Nino.
Zimbabwe’s inflation situation has also been worsened by the ongoing power crisis. In a note recently, the state-owned power-generating company warned of prolonged blackouts because of a technical fault. These faults could lead to higher prices in the near term.
While Zimbabwe’s inflation has risen, gains have been mitigated by the relative stability of the ZiG currency – at least the official one.
Zimbabwe ZiG faces major challenges
The Zimbabwe ZiG has fallen slightly since its launch in April after the other currency fell by over 80%. Its stability happened as some other popular African currencies like the Nigerian naira and the Egyptian pound fell.
More people in Zimbabwe are using the currency. A recent report by the central bank showed that Zimbabweans are using the currency for about 40% of payments. This is a big improvement since the number stood at 20% in April.
This adoption happened as the government transitioned most of its services to the ZiG. Also, authorities have continued to crack down on the black market, which it has blamed for the collapse of the other local currencies.
However, as we have written before, the Zimbabwe ZiG faces difficult odds of survival. First, many people in Zimbabwe have a good memory of what happened in the past 16 years. In this period, the government introduced new currencies, only for them to crash.
As a result, the lack of confidence in the local currency has forced many people to embrace the US dollar. Overcoming this situation will be the biggest challenge for the government and the central bank.
Second, Zimbabwe is mostly a dollar-based economy since 80% of all transactions are handled using the currency. It will be difficult to force companies and the informal sector to accept the ZiG.
While many formal companies are accepting the ZiG currency, they are then converting their cash to US dollars. In a note, Hippo Valley, a leading sugar company said that many companies were afraid of loading up ZiG since most suppliers were demanding hard currency. This explains why the parallel market has started to thrive again.
Additionally, Zimbabwe will struggle to ensure that the backing of the currency to gold and cash is maintained. Historically, countries which have pegged their currencies have needed substantial resources to help them intervene in times of strain.
The odds are also stacked against the ZiG because, data by the IMF shows that only Poland, Israel, Mexico, and Pakistan have succeed in de-dollarisation in the past decades.
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