In 2009, following an extreme bout of hyperinflation, Zimbabwe abandoned its national currency. During the period of hyperinflation, prices were increasing at an astonishing rate of 5 billion percent annually. The inflation rate was so high that customers in grocery stores and restaurants would see prices increase between the time they entered the business and the time they left. This rapid depreciation of value in the local currency caused residents to lose faith in the Zimbabwe Dollar and abandon it for other, more stable currencies.
Over the past 15 years, the government has attempted to introduce several new currencies, but each time it failed because of lack of trust and faith in the government. Their latest attempt, introduced in April 2024, is a currency purported to be backed by the nation’s gold reserves, the ZiG (short for Zimbabwe Gold). It was originally launched as a digital currency but is now available in paper and coin form. The government, however, is still struggling to restore the population’s faith that they can responsibly manage their currency’s value. Despite promotional efforts, the government is not having much success encouraging the locals to accept the currency voluntarily, so they are trying to do it by force.
There has long been an unofficial currency exchange market in Zimbabwe, where exchange rates are typically higher than the official rate (i.e. ZiG/$). But officials have recently begun arresting traders and threatening them with years in prison for violating the law. However, laws governing the use and acceptance of ZiGs somewhat create the need for the parallel market. Some businesses and government agencies are required to make all transactions in ZiGs, while others are exempt from the rule and can conduct business in US Dollars. Banks also have limits on how much they can exchange at the official rates, which is not nearly enough to meet demand.
Many economists and business leaders are skeptical that this police-forced approach will be successful. But who knows? Maybe the sixth time is the charm.
Discussion Questions:
- What are the advantages and disadvantages of a gold-backed currency compared to a fiat currency?
- Which other countries use the US Dollar as their official currency?
Sources| https://www.africanews.com/2024/05/27/zimbabwes-new-gold-backed-currency-faces-public-skepticism-amid-crackdown/; Photo by Christine Roy on Unsplash