USD to ZiG: Here’s why the Zimbabwe currency is crashing

The world’s newest currency is imploding as concerns about whether the experiment will work out. Zimbabwe Gold, popularly known as the ZiG, has plunged to its lowest level against the US dollar, erasing all the initial gains. 

Data by the Reserve Bank of Zimbabwe (RBZ) shows that the USD/ZIG pair surged to 13.67, up from its initial price of 13.56. It had initially peaked at around 7 against the US dollar, pushing the central bank chief to hint of an in intervention if the trend continued.

For starters, the Zimbabwe ZiG is a new currency aimed at solving a perennial currency crisis in the country. It is the country’s sixth attempt to have a stable currency. The previous Zimbabwe dollar was launched in 2019 and collapsed this year. 

The ZiG currency is backed by gold and a basket of currencies such as the US dollar. According to the RBZ, it is backed by about 2.5 tons of gold and about $100 million in foreign currency. 

There are several reasons why the ZiG currency has fallen to its all-time low. First, many Zimbabweans are afraid of getting involved in this experiment since they have been burned before. People and businesses that bought and held the previous currencies have seen their purchasing power fall over the years. 

Second, this is an experiment that has not been tried in other countries before. The most recent dollar-backed currency was the US dollar. President Richard Nixon ended the dollar peg to curb inflation and the conversion became difficult. 

In ZiG’s case, it is unclear what will happen if there is a strong demand for the currency. At the current price, the 2.5 tons of gold are worth over $186 million, bringing the total holdings to $286 million. These funds are barely enough to back the currency.

Third, the ZiG token is different from other backed assets, including stablecoins. In the case of a stablecoin like Tether, users redeem their USDT tokens with fiat currency instantly. It is not possible to redeem any amount of ZiG tokens for gold or US dollar equivalent.

It is also unclear whether Zimbabwe’s neighbouring countries like South Africa, Zambia, and Mozambique will accept the ZiG currency. 

Finally, Zimbabwe is mostly a dollar-based economy. Data shows that the greenback is used in over 80% of all transactions in the country. The government has embraced this and added the greenback as a legal tender until 2030. It also publishes two inflation figures, one for the local currency and the one for the US dollar.

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