Why Is ZIG Facing Stability Issues And Threatening To Throw Zimbabwe Into Another Economic Chaos

By Dr Masimba Mavaza

Official currency substitution or full currency substitution happens when a country adopts a foreign currency as its sole legal tender, and ceases to issue the domestic currency. Another effect of a country adopting a foreign currency as its own is that the country gives up all power to vary its exchange rate.

Creating a new currency unit with the same value with its predecessor is a complex challenge due to several factors. It is difficult for the new currency to be accepted.
When governments intervene in currency markets to subsidize their exports, they violate the principles of free trade and force the market to ignore normal pressures of supply and demand. Free trade supports Zimbabwe’s exports and local employment but free trade in goods and services requires free trade in currencies.
Because trade happens through the exchange of money, currency can be as important an influence on trade as the qualities of the traded goods or services themselves.
So governments need to intervene in currency markets this is only possible if you have your own currency which you can control. In order to subsidize exports, we violate the principles of free trade and force the market to ignore normal pressures of supply and demand. This violation is acceptable when the goods controlled is the currency. Countries need to have their own currency so that it becomes easier to control the supply of the currency.

While Free trade supports exports and jobs, it should be noted that free trade in goods and services requires free trade in currencies.
Government intervention in currency markets distorts trade flows and undermines free trade agreements if traders are to be forced on what currency to use.
Currency must be that which people trust and have confidence in.
Currency manipulation is a policy used by governments and central banks of some of some largest trading partners to artificially lower the value of their currency (in turn lowering the cost of their exports) to gain an unfair competitive advantage.
Simply explained, in order to weaken its currency, a country sells its own currency and buys foreign currency. Following the laws of supply and demand, the result is that the manipulating country reduces the demand for its own currency while increasing the demand for foreign currencies.

The International Monetary Fund (IMF) and the World Trade Organization (WTO) have provisions prohibiting the use of currency manipulation to gain trade advantages. Based on IMF principles, a three-part test can be used to clearly identify a currency manipulator within existing or future trade agreements. The Zimbabwean situation is that the government did not introduce ZIG to replace the US dollar but to complement it. The consumers of the ZIG are skeptical and have no trust in the complementing currency.
Zimbabwean made products can compete anywhere in the world within a free market. But when countries manipulate currencies and unfairly lower the cost of their exports, markets are distorted in three significant ways, damaging the economy and costing Zimbabwe big time. Because Zimbabwe uses US dollar as a parallel currency consumption tilt on the side of the US dollar. The US dollar is very strong as compared to our region’s currency. This then makes our exports more expensive and make our own currency weak. This then increases the cost of our exports, making them less attractive to consumers in regional countries causing reduced Zimbabwean exports and a loss of local jobs.
Other countries exports to the Zimbabwe will have an unearned competitive advantage

The region’s weaker currency lowers the cost of their exports, making them more attractive than Zimbabwean made goods, causing fewer sales of out products and a loss of Zimbabwean jobs.
The uncertainty of our currency will make our exports to other countries become less competitive
The regions weaker currency as compared to the U.S. dollar we use increases the cost of our exports in all global markets, making them less attractive to consumers the world over, causing reduced Zimbabwean exports and an increased unemployment. The reliance on the US dollar is a disaster in future.
Manipulating currency to gain an unfair competitive advantage is already prohibited for members of the IMF and WTO, but the prohibitions lack teeth. The solution is simple: strong and enforceable currency rules must be included in all future trade agreements.
If these rules are included, any country found to be in violation would lose the benefits of the trade agreement. This will strongly discourage currency cheating and protect free trade and free market principles.
Different countries have varying economic conditions, inflation rates, and monetary policies. A parallel currency regime would not account for these differences, potentially destabilising our economy as a country.

As we all know that Currency is often tied to national sovereignty. Countries may be reluctant to give up control over their monetary policy to a global currency, as this would limit their ability to respond to local economic conditions. So using foreign currency as legal tender in your country has very limited advantages.
Current currencies fluctuate in value against one another based on supply and demand, trade balances, and interest rates. A multi currency regime would need a stable mechanism to manage these fluctuations. For a currency to function effectively, it needs to be widely accepted and trusted by the public. Introducing a new currency would require significant time and effort to build this trust so ZIG will not miraculously happen. It will need time for acclimatisation.
Different regions have varying cultural practices regarding money and trade, which could affect the acceptance and use of a multi currency.
Overall, while a unified ZIG currency could simplify trade and reduce exchange rate risks, the practical challenges and implications make it a difficult to accept very fast.

Today a growing number of transactions are conducted in currencies other than the dollar, such as the yuan, issued by China. This can be explained by the growth of the Chinese economy, as well as current-day geopolitical crises (the consequences of the war in Ukraine, namely the boycott of Russia and the abandonment of payments in euros for Russian energy, have led to the European money’s decline among international currencies, in favour of the yuan).
A major gap between the official exchange rate and the informal or market rate meant that Zimbabwean price system has become complex and inefficient. This is controlled by the black market. This, in turn, created complexities in accounting and statistical reporting. So the government decided to introduce a new currency before launching market-oriented reforms. Currency reform was regarded as the foundation for further strengthening the macroeconomic framework, particularly monetary transmission: the more the population relies on the local currency rather than U.S. dollars, the more control the government has over macroeconomic policy.
The introduction of a new currency is not undertaken lightly. The motivation could be hyperinflation, exchange rate collapse, massive counterfeiting of the existing currency, or even war.
Changing a national currency is a highly political decision. Sometimes the existing currency does not meet the economy’s needs. The typical economy in need of currency reform is cash based and highly dollarized, with multiple currencies circulating at the same time.

The single most important price in any economy is the price of its currency vis-à-vis other currencies. Countries that assign non-market-based exchange rates for different goods or services—or for imports versus exports—tend to have significant distortions in their economy. Over time, this usually leads to slower growth overall. Eventually, the general public, the business community, and politicians may start pressing for currency reform and the introduction of a new currency.

Currency reforms are typically complex and risky: global experience confirms that a successful outcome is never guaranteed. The main ingredient in the successful introduction of a new currency is a strong commitment by the central bank together with the government to take the steps needed to ensure that the new currency is perceived as stable by companies, the general public, and the international community.
Despite the challenges the ZIG will settle and it will gain its respect soon. Our national pride should reflect on the love we have on our own currency.