When the Zimbabwe Gold (ZiG) was introduced in April 2024, the government touted it as a currency backed by gold reserves, claiming this would make it resistant to exchange rate fluctuations. However, recent statements by Finance Minister Mthuli Ncube have cast doubt on this assertion, echoing past instances where government promises about currency stability have fallen short.

The Minister’s Puzzling Remarks

In a recent address to Parliament, Finance Minister Mthuli Ncube made statements that seem to contradict the initial claims about the ZiG’s gold backing. According to The Herald, the Minister said:

“The exchange rate of the ZiG against the US dollar will be determined by market forces, but we will ensure that it remains stable through our gold reserves.”

This statement raises several questions:

If the ZiG is truly backed by gold, why would its exchange rate be determined by market forces?
How can the government “ensure” stability while simultaneously allowing market forces to determine the rate?
What specific mechanism links the gold reserves to the currency’s value?

Echoes of Past Promises

These unclear explanations are reminiscent of previous government assurances about currency stability that failed to materialize. As we detailed in our article “The Kingdom of Funny Money”, Zimbabwe has a history of introducing new currencies with grand promises, only to see them rapidly devalue.

The bond notes, introduced in 2016, were similarly claimed to be backed by a $200 million facility from Afreximbank. However, the quantity of bond notes in circulation soon exceeded this amount, and their value against the US dollar plummeted.

The Reality of Gold-Backed Currencies

For a currency to be truly gold-backed, several conditions must be met:

A fixed exchange rate between the currency and gold must be established and maintained.
The issuing authority must have sufficient gold reserves to back the currency in circulation.
There should be a mechanism for currency holders to exchange their notes for gold at the fixed rate.

So far, the Zimbabwean government has not provided clear information on any of these aspects regarding the ZiG.

Salary Reviews and Economic Realities

Minister Ncube’s statements came in the context of discussions about civil servant salary reviews. He emphasized the need for salary adjustments to be in line with economic growth and productivity to avoid fueling inflation.

While this principle is sound economic theory, it overlooks the reality that many civil servants are struggling to meet basic needs due to the rapidly increasing cost of living. The government’s ability to provide meaningful salary increases is constrained by its limited fiscal space and the need to maintain economic stability.

The ZiG’s Performance So Far

When we asked “Will the ZiG kill Zimbabwe’s foreign currency black market?” shortly after its introduction, we expressed skepticism. Recent market trends suggest our caution was warranted:

The official exchange rate has moved from 1 USD : 13.56 ZiG at introduction to 1 USD : 25 ZiG as of October 2024.
Parallel market rates are significantly higher, with some traders using rates as high as 1 USD : 40 ZiG.
Many businesses, particularly in the informal sector, are increasingly reluctant to accept ZiG payments.

These developments indicate that the ZiG is facing many of the same challenges as its predecessors, despite the claims of gold backing.

Frequently Asked Questions

Q: Is the ZiG actually backed by gold?
A: While the government claims it is, they have not provided clear evidence or mechanisms to support this assertion.

Q: Can I exchange my ZiG for gold?
A: Currently, there is no mechanism for the public to directly exchange ZiG for gold.

Q: How does the ZiG’s performance compare to previous currencies?
A: While it’s still early, the ZiG is showing signs of depreciation similar to previous Zimbabwean currencies, albeit at a slower rate so far.

Q: Will civil servants receive salary increases in ZiG or USD?
A: The government has indicated that salaries will be reviewed in ZiG, but has not ruled out potential USD allowances.

Looking Ahead

As Zimbabwe continues to grapple with economic challenges, the fate of the ZiG remains uncertain. The government’s lack of clarity on the currency’s gold backing and the Minister’s confusing statements do little to inspire confidence.

For Zimbabweans, particularly those on fixed incomes like civil servants, the coming months will be crucial. Will the ZiG maintain some semblance of stability, or will it follow the path of its predecessors? Only time will tell, but history suggests caution is warranted.

At Zimpricecheck, we’ll continue to monitor the situation closely, providing updates on exchange rates, prices, and economic developments. Stay informed by regularly checking our website or subscribing to our WhatsApp channel for real-time updates.