In recent weeks, the Zimbabwean gold-backed currency (ZiG) has shown remarkable resilience and an unexpected appreciation in value. This trend has sparked conversations in financial circles and on the streets, with many wondering what has changed in an economic environment long characterised by volatility. This article delves into the factors driving this change, explores historical parallels, and assesses what this might mean for ordinary Zimbabweans.

The Current Context

Since its introduction, the ZiG has often been at the centre of debates about its sustainability. Official narratives emphasised that the currency was backed by gold, limiting the possibility of uncontrolled issuance. However, scepticism persisted, primarily due to Zimbabwe’s fiscal history of overspending and excessive money printing.

In October 2024, the ZiG traded at approximately $40 ZWG to $1 USD on the black market, with some traders accepting rates as high as $50 ZWG. However, by mid-November, the rates had dropped significantly, with bulk traders struggling to acquire ZiG even at $35 ZWG to $1 USD. The official exchange rate mirrored this trend, falling from $30 ZWG to just under $25 ZWG to $1 USD. This sharp appreciation in value has caught many by surprise.

Government Spending and the ZiG Supply

Government circular limiting expenditure

The primary driver of the ZiG’s appreciation appears to be government fiscal discipline—or at least a temporary tightening of the purse strings. A recently circulated Treasury Circular (attached to this article) outlines stringent measures implemented to contain expenditures for November and December 2024. These measures include:

Prioritising the payment of outstanding unfunded obligations.
Limiting foreign travel expenses unless externally funded.
Deferring local workshops, except those approved directly by the Treasury.
Rationalising operational fuel allocations by 50%.

The Treasury’s directive is a clear response to the recent economic turbulence, including the 43% depreciation of the ZiG against the US dollar earlier this year. The sharp decline in value was exacerbated by a backdated civil service salary increase in October, further straining fiscal resources.

This circular highlights the direct link between government spending and the stability of the local currency. By cutting non-essential expenditures and restricting the flow of ZiG into the economy, the government has inadvertently created a scarcity of ZiG, which has, in turn, boosted its value.

The Role of Statutory Payments and Market Dynamics

One notable trend is the increased demand for ZiG among businesses and individuals seeking to meet statutory payment obligations. These requirements are usually denominated in local currency, making the ZiG indispensable for such transactions. This surge in demand, coupled with the Treasury’s restricted budget support, has further constrained supply, driving the appreciation.

The black market has reflected this trend. Whereas ZiG often chased USD in the past, there is now an apparent reversal, with USD holders actively seeking ZiG. This unusual scenario underlines how fiscal policies can temporarily reshape currency dynamics.

The ZiG’s Gold-Backed Promise: Fact or Fiction?

When the ZiG was introduced, the Zimbabwean government asserted that it was backed by gold, ostensibly to prevent inflationary pressures from unchecked printing. However, this promise has faced scrutiny from experts who question whether the mechanisms for gold backing are robust or transparent enough.

Our earlier analysis pointed out that despite these assurances, the ZiG experienced rapid devaluation in its. This raised concerns about whether the currency was genuinely insulated from the fiscal indiscipline that plagued previous iterations of the Zimbabwean dollar.

Explore the government’s claims about the ZiG’s gold backing here.

Long-Term Outlook

While the recent appreciation of the ZiG offers a glimmer of hope, it is essential to approach this development with caution. Historically, periods of currency stability in Zimbabwe have often been short-lived, primarily because underlying structural issues remain unaddressed. The current appreciation is largely the result of reduced liquidity—a factor that may not hold once the government resumes regular expenditure patterns.

The fact that the black market rates drive economic decisions for most people in the economy despite the government insisting we use the official rate underscores the persistent disconnect between official policies and economic realities. Until Zimbabwe addresses fundamental issues like production deficits, export underperformance, and public sector inefficiency, the ZiG’s stability will remain fragile.

Learn more about exchange rate trends in Zimbabwe here.

Frequently Asked Questions

Why is the ZiG appreciating now?
The government has implemented strict expenditure controls, reducing the supply of ZiG in the economy. Simultaneously, demand for ZiG has increased, particularly for statutory payments, creating a temporary scarcity that has boosted its value.

Is the ZiG genuinely backed by gold?
While the government claims that the ZiG is backed by gold, the lack of transparency and independent verification raises questions about the robustness of this backing.

What does this mean for ordinary Zimbabweans?
The short-term appreciation of the ZiG may lead to lower inflation and more stable prices. However, if fiscal discipline is not maintained, these gains could be quickly reversed.

How does this affect black market rates?
Black market rates have also adjusted, with the ZiG becoming more valuable. This trend reflects the broader scarcity of the currency in circulation.

Conclusion

The recent appreciation of the ZiG is a welcome development, particularly in a country where currency instability has been the norm. However, this stability is fragile and contingent upon continued fiscal discipline. The government’s ability to maintain these controls, while addressing broader economic challenges, will determine whether the ZiG’s current trajectory is sustainable.

For now, Zimbabweans can cautiously enjoy the benefits of a stronger local currency but should remain vigilant. After all, history has taught us that economic policy in Zimbabwe often operates in cycles, with gains frequently undone by subsequent fiscal mismanagement.

For the latest updates on Zimbabwean currency trends, stay tuned to Zimpricecheck.