In today’s Finshots, we talk about Zimbabwe’s hyperinflation woes and see if its new currency ― ZiG (Zimbabwe Gold) can tame it.
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The Story
Six!
That’s how many national currencies Zimbabwe has had in the last 15 years. Thanks to the country’s attempts to tame hyperinflation ― a term used to describe excessive price rise, usually over 50% month over month. In Zimbabwe though, that figure touched a whopping 89.7 sextillion per cent year on year at its peak in November 2009. That’s 89.7 followed by 21 zeros by the way. So the country was way overboard the threshold that defined hyperinflation.
And the Zimbabwean government now thinks that their sixth and latest currency, ZiG or Zimbabwe Gold could do the trick.
But wait… How did Zimbabwe even get here, you ask?
Well, to understand that we’ll have to go back to 1980 when the South African nation became independent from the British. Minority foreign settlers owned most of the commercial agricultural land in Zimbabwe at the time, leaving local Zimbabweans landless.
This didn’t go down well with the government, which brought in land reforms to win the support of its citizens. Over the next three decades it simply transferred land, often forcibly, to the locals. Slowly locals came to own more than 85% of these commercial farms.
But there was a problem. These agricultural lands were the heart and soul of Zimbabwe’s trade. It’s was the cornerstone of the country's commercial food production engine. But the new owners weren’t really equipped to deal with the complexities of commercial farming. With no real knowledge, they switched to growing food for themselves and their families. And that meant that agricultural production dropped. Between 2000 and 2010 alone, food production fell by 60%. This not just led to a food shortage, but also set the stage for massive economic turmoil.
Agricultural export companies had to shut shop and export earnings dwindled. On the other hand, arable but idle lands which were earlier used as collaterals by farmers to get loans, began to lose their commercial value too. Banks suddenly became laden with bad debts and collapsed.
All of this put together meant that the country had no money to even import basic necessities like food and clothing.
So guess what it did?
It printed more money!
And you know what happens when you simply print money without actually backing it with production of goods and services right?
The supply of money in the economy increases, sparking widespread inflation. By 2009 things went haywire. Zimbabweans couldn’t even buy a loaf of bread for 500 million Zimbabwe dollars. Prices were doubling every 24 hours. So people began spending their money as soon as they got it simply because waiting for tomorrow meant paying more for the same goods. That encouraged businesses to jack up prices even more.
The government wasn’t helping either. It began introducing currencies of higher denominations. And even printed a 100 trillion Zimbabwe dollar note to keep up with skyrocketing prices. When that triggered a vicious cycle of uncontrolled inflation, it declared inflation illegal and banned price rise!
But sadly, escapism isn’t an economic reform. And Zimbabwe had to do something about it. So it began redenominating its existing currency. Simply put, it issued new notes without the zeros. It was probably inspired by Rentenmark, a redenominated currency Germany introduced in the 1920s to tame inflation. But the thing with Rentenmark was that it was printed in limited quantities and was backed by equal amounts of guarantees in the form of mortgages on German land or bonds on its trade, commerce and banking industry.
On the flip side, Zimbabwe didn’t even have any real economic reforms or property to back its redenominated currencies. Rather, it simply converted the existing balances of old money into a new currency, not once but multiple times. It didn’t stop printing money either.
The bottom line was that none of this worked and the Zimbabwe dollar became worthless.
That’s when the government ditched the Zimbabwe dollar and adopted a multi-currency system. So Zimbabweans could transact in foreign currencies, predominantly the US dollar. That way the government wouldn’t be tempted to incessantly print money. They’d only have to deal in currency backed by stable global economies.
It worked! Finally, Zimbabwe’s inflation nosedived. By June 2018 its annual inflation dropped to 48%.
But cut to today, hyperinflation is back in the country, topping 500% in recent years.
What the heck happened again; you ask?
Well, the government was itching to launch its own currency to steer economic growth on its own terms and introduced the RTGS (Real Time Gross Settlement) dollar in 2019, only to get back to square one.
Despite that, the government thinks that things could be different with the ZiG.
You see, a couple of years ago the government began issuing 22 carat gold coins that could be easily converted into cash. This inspired the Reserve Bank of Zimbabwe to issue equivalent amounts of digital currency that people could transact with. By March 2024, the central bank sold digital tokens that were worth over 900 kg of gold.
So yeah, the ZiG is Zimbabwe’s new currency backed by how much gold the country has. This means that there can only be so much money in the economy that matches its gold reserves. And that’s the government’s reasoning behind thinking that the ZiG could finally turnaround its economy. But can it?
Look, backing currencies with gold isn’t new. It’s something that most countries in the world began doing in the 1930s to tackle inflation, following the United States. But back then, countries made sure that they had enough gold and worked together to keep gold prices stable and protect their economy from extreme fluctuations.
But that’s not the case with Zimbabwe. Today no country in the world uses the gold standard. So Zimbabwe has to ensure that it manages price fluctuations by itself. Sure, its Central Bank has gold and cash reserve holdings that are more than 3 times the amount of ZiGs they’ve issued.
But that’s the figure it's officially reporting. And Zimbabweans can find it hard to trust the government or the Central Bank simply because they’ve lied to their citizens in the past. They’ve underreported how much money they printed to keep negative news on their economy under wraps.
Even now, nearly 80% of Zimbabwe’s transactions happen in the US dollar simply because there aren’t enough physical ZiGs people can use. Most of it is in the digital form.
Not just that. Zimbabwe has a problem of illegal street currency dealers. Most people don’t trust the local currency enough to use it efficiently. And you can’t blame them because they’ve seen their currencies collapse multiple times. So whenever they earn in the local currency, they take it to the black market where it gets exchanged at unofficial exchange rates. That not only weakens the local currency but tampers with the exchange rate the Central Bank sets.
And this lost trust is something that the government will have to win back.
Can they do it? We’ll only have to wait and see. Until then…
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