Zimbabwe's Currency Woes: A Devaluation Dilemma

Zimbabwe's central bank has taken drastic measures to combat the persistent weakness of its gold-backed currency, the ZiG. The bank has raised interest rates, devalued the ZiG by a staggering 43%, and implemented other measures in a bid to stabilize the economy. However, the move has raised doubts about the nation's ability to create a viable local currency, given its troubled history with previous failed attempts.

Tackling Inflation and Exchange Rate Volatility

Raising Interest Rates and Devaluing the ZiG

The Reserve Bank of Zimbabwe has taken a bold step by lifting the benchmark policy rate from 20% to 35%, a significant increase aimed at combating the country's rising inflation. The central bank has also devalued the ZiG, its gold-backed currency, by 43%, with the exchange rate now standing at 24.4 per dollar, up from the previous 14 per dollar.While the central bank did not explicitly confirm the devaluation, Governor John Mushayavanhu acknowledged the need for "greater exchange rate flexibility" to address the increased demand for foreign currency in the country. This move is seen as a direct response to the persistent weakness of the ZiG, which has been a source of concern since its introduction in early April to replace the Zimbabwean dollar.

Addressing Underlying Challenges

Analysts have cautioned that the new currency will continue to face challenges until Zimbabwe's underlying economic issues are addressed. The country has been locked out of global capital markets since 1999 due to a debt default, and it is still working to restore its international standing, despite concerns from Western nations about its human rights record.Farai Mutambanengwe, a Harare-based economist, noted that the devaluation is "just catching up to what has already happened on the market" and that what is truly needed is the removal of restrictions to allow the exchange rate to be market-determined. This would enable players to set rates that they deem appropriate, rather than relying on the central bank's interventions.

Combating Inflation and Preserving Macroeconomic Stability

The central bank has implemented additional measures to address the emerging exchange rate risks and maintain macroeconomic stability. These include raising reserve requirements on local and foreign currency deposits, as well as capping the amount of foreign currency an individual can take out of the country.The central bank has expressed confidence that these actions will yield results, with Mushayavanhu stating that the Monetary Policy Committee (MPC) "is convinced that the above measures will go a long way in addressing the emerging exchange rate risks." The MPC has also pledged to remain vigilant in monitoring any emerging risks to ensure continued macroeconomic stability.

Lessons from the Past and Skepticism about the Future

Zimbabwe's history with local currencies has been marked by failure, with the Zimbabwean dollar losing around 80% of its value since the start of the year. The ZiG, the nation's sixth attempt to establish a viable local currency since 2009, was met with immediate skepticism from Zimbabweans who have bitter memories of how previous local currencies had failed.The central bank has promised that the lessons from past failures have been learned and that the monetary authority will not print more ZiG than are backed by reserves. However, analysts have cautioned that the new currency will continue to face challenges until the country's underlying economic issues are addressed.The devaluation and other measures taken by the central bank are seen as a desperate attempt to stabilize the economy and restore confidence in the ZiG. However, the persistent weakness of the currency and the country's troubled history with local currencies have fueled doubts about the long-term viability of the latest currency experiment.