By The Zimbabwe ZiG currency has remained under pressure this year despite some bullish tailwinds for the economy. The official USD/ZWG exchange rate was listed at 27.6 by the central bank, while the black market rate stood at 40.
This performance marks a major deterioration for a currency that started trading at 13.56 against the US dollar in April last year.
Zimbabwe economic tailwinds
Zimbabwe’s economy is facing some major tailwinds this year. First, the prices of its top exports are in a strong rally this year. Gold price surged to a record high, and analysts are optimistic that it will continue soaring in the coming months. Some experts see it rising to $4,000.
Platinum price has also jumped to the highest point since June 2021. It has soared by over 40% from its lowest point this year, and the trend may continue soaring, with the next point to watch being at $1,337.
Similarly, palladium price soared to $1,045, its highest point since November 4. This is notable since these are some of Zimbabwe’s biggest exports.
Second, Zimbabwe expects that tobacco will resume growth this year. In a report in March, the government predicted that tobacco sales would jump by 21% this year as it recovers from last year’s drought. It expects the crop production to be 280 million kilograms after plummeting to 230.9 million last year.
Zimbabwe also expects that the country will have a 340% increase in crop production this year. Its food reserves have remained steady in the past few months.
Further, from a macro level, the government is counting on a bridge loan of about $2.6 billion to help it repay loans to institutions like the World Bank and the AfDB. While some countries are non-committal, the government hopes that it will secure the funds by next year.
Why the Zimbabwe ZiG currency has crashed
The Zimbabwe ZiG has crashed for several reasons. First, despite the central bank’s efforts, Zimbabwe is still a dollar-based economy, with the currency being used in over 80% of transactions.
Second, many Zimbabweans are, rightfully, afraid of holding a local currency following the past implosions. The country has had five currencies in the past decades, all imploding.
Fears that the gold-backed ZiG currency would crash were confirmed last year when the central bank devalued the currency by 40%, leading to instant losses among those who held it.
The fact that Zimbabweans are avoiding the ZiG is notable because of the high interest rates the central bank is offering. It raised interest rates to 35%, creating an instant carry trade opportunity, where investors borrow money in a low-interest-rate currency to invest in a higher-yielding one.
In Zimbabwe’s case, one can borrow the US dollar and pay about 5% and then invest in the ZiG, generating a 30% return. In a recent note, one analyst said that monetary policy will not fix the Zig, saying:
“Monetary policy won’t fix Zimbabwe’s problems and the government needs to generate more revenue and control deficit spending to get the economy on track.”
Read more: Here’s why the Zimbabwe ZiG currency faces a grim future
Summary
The Zimbabwe Central Bank introduced the ZiG in April 2024 as it sought to create a stable currency. The fear, however, is that most people and businesses will avoid the currency since they have lost money before.
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