Zimbabwe’s latest monetary reform, the Zimbabwe Gold (ZiG), is not merely another policy shift; it is a continuation of a long and difficult search for monetary sovereignty in an economy that has, over time, defaulted to the United States Dollar as its dominant medium of exchange. The central tension is clear: policymakers are attempting to engineer confidence in a domestic currency within a system where confidence has historically been eroded, sometimes abruptly and irreversibly.
By Brighton Musonza
The recent assertion by John Mushayavanhu that the ZiG is significantly undervalued, suggesting a notional equilibrium closer to 15:1 against the US dollar, invites a deeper interrogation of how currencies are actually valued in frontier economies. While the argument draws on reserve adequacy and gold backing, it does not fully engage with the behavioural and institutional realities that ultimately determine exchange rates in practice.
The Illusion of Reserve-Based Valuation
The governor’s position rests on a balance sheet logic: that existing reserves, including gold holdings, could theoretically absorb the domestic money supply at a stronger exchange rate. In a controlled, closed monetary system, this reasoning has merit. Under a strict Gold Standard or currency board arrangement, the relationship between reserves and money supply can anchor expectations and impose discipline.
Zimbabwe’s framework, however, is neither fully rules-based nor institutionally insulated from fiscal pressures. It operates in a hybrid space where discretionary policy decisions coexist with attempts at asset backing. This ambiguity weakens the signalling power of reserves. Markets, particularly in environments with a history of volatility, do not simply take reserve figures at face value. They ask whether those reserves are liquid, whether they are encumbered, whether they can be accessed without political interference, and, crucially, whether the authorities will maintain policy consistency when faced with fiscal or social pressure.
In this sense, the market exchange rate of 25–28 is not a mispricing in the conventional sense; it is a reflection of embedded risk. It incorporates a discount for uncertainty, a premium for convertibility risk, and a memory of past episodes when theoretical valuations proved irrelevant in the face of policy shifts.
Dollarisation as a Rational Market Outcome
The persistence of dollarisation in Zimbabwe is often framed as a policy failure, but from an economic standpoint it is better understood as a rational adaptation by households and firms. Currency choice, particularly in unstable environments, is governed by trust and predictability. The Confederation of Zimbabwe Industries estimates that over 90% of transactions are conducted in US dollars, a figure that underscores the depth of this adaptation.
What has emerged is not simply a preference for a foreign currency, but a fully internalised dollar-based system. Salaries are negotiated in dollars, rents are quoted in dollars, and even informal market transactions are frequently indexed to it. This creates a self-reinforcing loop: the more the dollar is used, the more indispensable it becomes.
Attempts to reverse this dynamic through administrative measures have historically struggled because they confront the underlying logic of economic agents. People choose the currency that minimises uncertainty. In Zimbabwe’s case, the US dollar offers stability not because it is imposed, but because it has proven resilient over time.
Inflation Stabilisation: Necessary but Not Sufficient
The reduction of inflation to single digits, with annual inflation at 4.4% in March, represents a significant policy achievement. Yet, in financial markets, credibility is not awarded for isolated outcomes but for sustained performance. Zimbabwe’s inflation history has been marked by sharp reversals, which means that current stability is viewed with caution.
The central bank’s decision to maintain interest rates at 35% reveals an underlying tension. Such a high nominal rate in a low-inflation environment suggests that policymakers are still guarding against instability, whether in the form of currency pressure or renewed inflationary impulses. It also reflects the difficulty of transitioning from a stabilisation phase to a normalised monetary environment.
For businesses and banks, this creates a complex landscape. Lending in local currency becomes expensive, while borrowing in dollars introduces exchange rate risk. The result is a financial system that remains shallow in local currency terms, limiting the development of domestic capital markets.
Exchange Rate Formation in a Fragmented Market
In theory, exchange rates should reflect macroeconomic fundamentals such as inflation differentials, productivity, and external balances. In Zimbabwe, however, the exchange rate is shaped as much by informal market dynamics as by official policy.
Parallel markets play a central role, not as aberrations but as price discovery mechanisms. They capture real-time demand for foreign currency, driven by import needs, remittances, and speculative positioning. The existence of contraband and grey-market goods—often imported from neighbouring countries and priced in dollars—further entrenches this system. These flows bypass formal channels, weakening the transmission of official exchange rate policies and creating multiple pricing layers within the economy.
In such an environment, the official rate becomes only one of several reference points, and often not the most influential.
The Role of Gold: Symbolism Versus Functionality
The introduction of the ZiG as a gold-backed currency carries symbolic weight. Gold, by its nature, evokes notions of stability and intrinsic value. However, the effectiveness of gold backing depends less on its existence and more on the framework governing its use.
For gold to function as a credible anchor, there must be transparency, convertibility, and strict limits on monetary expansion. Without these, gold risks becoming more of a signalling device than a binding constraint. Moreover, gold prices themselves are subject to global fluctuations, influenced by interest rate cycles, geopolitical tensions, and shifts in investor sentiment.
In Zimbabwe’s case, the gold backing may help shape perceptions at the margin, but it does not eliminate the need for institutional credibility.
External Pressures and Structural Constraints
Zimbabwe’s external sector remains vulnerable to shocks. The economy’s reliance on commodities, particularly gold, exposes it to price volatility. While export earnings have strengthened, they are not immune to global market dynamics.
At the same time, the prospect of an El Niño event raises the risk of agricultural disruption, which could necessitate increased imports and place additional strain on foreign exchange reserves. Rising global energy prices add another layer of pressure, given the country’s dependence on imported fuel.
These factors collectively limit the central bank’s room for manoeuvre. Even with improved reserve levels, sustaining currency stability in the face of external shocks requires a delicate balance.
Lessons from De-dollarisation Elsewhere
Zimbabwe’s situation is not unique. Several countries have grappled with entrenched dollarisation and have attempted, with varying degrees of success, to restore the primacy of their domestic currencies.
In Latin America, Peru offers a notable example of gradual de-dollarisation. Following a period of high dollarisation in the 1990s, authorities implemented a combination of macroeconomic stabilisation, inflation targeting, and prudential regulations that discouraged dollar lending. Over time, the share of dollar-denominated deposits and loans declined, not through prohibition but through the steady rebuilding of confidence in the local currency.
Bolivia pursued a more assertive approach, combining exchange rate stability with regulatory measures that incentivised the use of the local currency. The government also imposed taxes and reserve requirements that made dollar transactions less attractive. This, alongside a period of strong commodity revenues, enabled a significant shift toward the boliviano.
In Africa, Democratic Republic of the Congo has experimented with administrative restrictions on the use of the US dollar in certain domestic transactions, particularly in the public sector. While these measures have had some impact, the persistence of dollar usage highlights the limits of enforcement in the absence of broader macroeconomic stability.
Rwanda has taken a more structured approach, requiring that prices and transactions within the domestic economy be denominated in the local currency. This policy has been supported by relatively stable macroeconomic conditions and strong institutional frameworks, allowing the Rwandan franc to maintain its role without triggering widespread market resistance.
These examples illustrate a key principle: de-dollarisation is not achieved through decree alone. It is the outcome of sustained stability, credible policy frameworks, and, in some cases, carefully calibrated incentives or restrictions.
The Political Economy of Currency Reform
Currency reform in Zimbabwe cannot be separated from its fiscal context. Historically, monetary instability has often been linked to fiscal pressures, where the need to finance government expenditure has overridden monetary discipline.
For the ZiG to succeed, there must be a credible commitment to fiscal restraint and central bank independence. Without this, even the most well-designed currency framework will struggle to gain traction.
The caution expressed by policymakers regarding the potential outlawing of foreign currency use by 2030 is therefore well-founded. Prematurely forcing de-dollarisation could disrupt economic activity, drive transactions further into the informal sector, and erode whatever confidence has been rebuilt.
A Forward-Looking Assessment
The current valuation of the ZiG reflects a transitional phase. It sits between the central bank’s theoretical assessment and the market’s more cautious view. Bridging this gap will require more than technical adjustments; it will require time, consistency, and a demonstrable commitment to stability.
Banks, corporates, and investors will continue to hedge their positions, balancing exposure between local and foreign currency assets. The development of a deep and liquid local currency market remains a critical objective, but one that cannot be rushed.
Conclusion
Zimbabwe’s monetary journey is ultimately about rebuilding trust. The disparity between the official narrative and market pricing is not simply a disagreement over numbers; it is a reflection of differing assessments of risk and credibility.
Currencies derive their strength not only from reserves or policy frameworks, but from the confidence of those who use them. In Zimbabwe, that confidence is still in the process of being restored. Until it is firmly re-established, the US dollar will remain central to the economy, and the ZiG will continue its gradual and uncertain search for equilibrium.
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