The Birth of a New Currency- ZiG. Will it make a difference?
The year 2024 is full of new beginnings, so is for Zimbabwe. They have introduced their brand-new local currency- ZiG which stands for Zimbabwe Gold. People only demand the gold which shines brighter, the pale ones are discarded. Will this new gold shine brighter or become pale in time? What do you think? Let’s see how badly Zimbabwe require this new gold to shine.
Reserve Bank of Zimbabwe (RBZ) introduced a “structured currency” called ZiG on April 5, 2024. They are issued in denominations made of 1ZiG, 2ZiG, 5ZiG, 10ZiG, 20ZiG, 50ZiG and 200ZiG. Let’s not confuse this new ZiG with the previous one. Previously, the investment instruments like gold coins and GBDTs were called ZiG, but now the structured currency which is the new local currency and legal tender is known as ZiG.
The Structured Money is different from the Currency Board System. The former is based on a market determined exchange rate, whereas the latter is based on a fixed exchange rate system and set by statue.
According to the RBZ, the new structured currency is expected to restore the confidence in the local currency and to protect the multi-currency system. This together with monetary policy measures will bring price and exchange rate stability in the economy. Now the question arises- WHY?
Before ZiG, Zimbabwe struggled with a stable currency. They mostly used the US dollar since their Zimbabwean dollar was rendered useless due to extreme inflation in the late 2000s. There was no control over the economy and the dependance on foreign money increased day by day.
Now you would ask what are the consequences of huge dependance on foreign money? The country adopting the foreign currency will be at the mercy of the foreign country’s monetary policy which may affect the objectives and aims of the policymakers of the former country. We can say that in Zimbabwe, Dollarization took place when their own Zimbabwe Dollar held no more value. When US dollars are partially or wholly substituted as exchange in a country, it is termed as Dollarization.
I consider, all of you have heard that printing money is not a good way to go for the government to fight economic turmoils. But why? More money means more demand, and eventually more growth, right? NO. Let’s look into some basic economics:
From Fisher’s Quantity Theory of Money i.e., M*V = P*T where M=Money supply, V= Velocity of Money, P=Prices and T=Transactions where we take output as its proxy. It is assumed that V and T remains constant in short term, so P is directly proportional to M. In simple terms, the more you increase the money supply (print more money) the prices will rise more (leads to inflation).
This theory is not always held true in the real world, but it very well did for Zimbabwe. To read exactly what happened, read this post by an Economic Research Analyst at EConsult Asia.
Though Zimbabwe has issued its new currency to emerge from its economic troubles and money crisis, its past history may pave hindrance and may take time to build public trust in its new currency. Earlier, their attempts to replace the US dollars failed drastically, this is Zimbabwe’s last attempt to battle inflation, instability and dependance. Usually, when a country introduces a new currency, there is not so much of a public broadcast and marketing, but in order to build trust, Zimbabwe had hyped their way for people to willingly substitute US Dollars to ZiG.
WHAT PROBLEMS DID ZIMBABWE FACE AFTER ISSUANCE OF ZiG?
Even after the issuance of ZiG, there was high demand for US dollars. This shows public mistrust in their government, Zig which held value largely in the official market has creeped into the black market, where $1 can be exchanged for up to 17 ZiGs.
Almost 200 street currency dealers are undermining and devaluing the new currency by using higher exchange rates than the official one. Vendors in the unlicensed sector that employees more than 80% of the adult Zimbabweans, till to the date accept only dollars. Gas Stations are allowed to refuse ZiG in favor of U.S. Dollars. People of Zimbabwe crave for US Dollars and it’s not an easy task to shift one’s craving to a new item. It will require incentives, merits and public to trust the government again.
Observing their economic health, the issuance of a new currency by Zimbabwe was very much crucial at this point. Hoping they have a strategy prepared to counter the backfires from public. It will take time, but only time will tell- Will ZiG have the same fate as other six currencies introduced earlier, or will it be powerful enough to make history?
