Zimbabwe is back in the news again when it comes to monetary economics. The southern African country, which unfortunately became infamous for producing one-billion Zimbabwean dollars banknotes and reaching unprecedented levels of hyperinflation, thus one of the worst economies in history, is now back in the news for this time producing a new currency that is backed by gold.
The relationship between Zimbabwe and inflation is a never-ending tumultuous love affair that makes the Zimbabwean government take drastic measures. Recently, the Reserve Bank of Zimbabwe has launched a new gold-backed currency called ZiG to help stabilize the economy and protect citizens from currency fluctuations and sky-high inflations. ZiG, the gold-backed currency, which stands for “Zimbabwe Gold,” was introduced by the Central Bank governor, John Mushayavanhu on April 5, 2024.
The ZiG replaced the Zimbabwean dollar, which had lost almost all of its value once again. The Reserve Bank of Zimbabwe announced that they have 2.5 tons of gold reserves to back the new currency. Zimbabweans have 21 days to convert their old Zimbabwean dollars into ZiGs, and the new banknotes come in denominations between 1 and 200 ZiGs.
This then begs the following questions: why does the Zimbabwean economy constantly fail? Why is the Zimbabwean economy unable to contain inflation?
The major answer to these two questions is government intervention. Indeed, A key driver has been the Zimbabwean government's history of printing too much money to finance spending. This increases the money supply relative to available goods and services, leading to inflation. Moreover, high inflation erodes trust in the currency. People may hoard goods or switch to using foreign currencies, further accelerating inflation as the local currency weakens.
Zimbabwe's political climate has been volatile, discouraging investment and hindering economic growth. This makes controlling inflation more challenging. And as a developing nation, Zimbabwe is vulnerable to external factors like droughts or fluctuating commodity prices. These disruptions can strain the economy and trigger inflation.
In the early 2000s, government spending rose significantly, fueled by printing money to cover expenses. This coincided with a decline in agricultural production due to land reforms. The result: a surge in money supply chasing after fewer goods, causing prices to spiral out of control. People lost trust in the Zimbabwean dollar, leading to a switch to foreign currencies like the US dollar. This further weakened the local currency and created a vicious cycle of inflation.
Political turmoil can discourage investment and disrupt economic activity. Uncertainty discourages businesses from expanding or hiring, hindering economic growth. This makes it harder for the government to generate revenue through taxes, potentially leading them to print more money to cover spending gaps, fueling inflation again.
Zimbabwe has taken steps to address these issues, including adopting a multicurrency system and implementing fiscal reforms to curb government spending. The recent launch of the gold-backed ZiG is another attempt to restore confidence in the currency. Whether these efforts will be successful remains to be seen, but they represent a move toward economic stability.