Zimbabwe’s second-largest city, Brian Tinotenda operates from a small rented space where he sells basic groceries like rice, cooking oil, and cornmeal. These are the same products he once sold while working at a Spar supermarket before he started his own venture in 2021. Unlike his days at Spar, all of Tinotenda’s wares are now priced in US dollars, a practice common among informal traders but one that the Zimbabwean government is hoping to change with the introduction of a new currency.
Earlier this month, the Zimbabwean government launched the ZiG, short for Zimbabwe Gold. This new currency, backed by 2.5 tons of gold and about $100 million in foreign currency reserves held by the central bank, represents one milligram of gold per ZiG and is valued at approximately 7 US cents. The introduction of the ZiG is a strategic move aimed at stabilizing the volatile exchange rate that has plagued Zimbabwe’s economy and retail sector, giving an upper hand to informal traders like Tinotenda who operate primarily in US dollars.
For over a decade, Zimbabwe has grappled with severe currency issues, stemming from hyperinflation that peaked in 2008 at an official rate of 500 billion percent. This economic turmoil led the country to adopt the US dollar for more than a decade, before reintroducing the Zimbabwean dollar in 2019. However, the reintroduction faced significant challenges as businesses were required to use the Zimbabwean dollar at an official exchange rate set by the central bank, widely regarded as overvalued. This situation has benefited informal traders who continued using the more stable American dollar, allowing them to sell goods at more competitive prices compared to those in formal retail settings.
Major retailers like Pick n Pay Stores Ltd. and OK Zimbabwe Ltd., which have been operating in the country for several decades, found themselves at a disadvantage. They were compelled to comply with the central bank’s overvalued exchange rate, making their goods significantly more expensive in US dollar terms than similar items sold on the street. The policy of maintaining an overvalued official exchange rate has been criticized widely. The International Monetary Fund has pointed out that such policies promote informality, erode the tax base, and undermine long-term economic growth.
In response to these challenges, the introduction of the ZiG has been welcomed by some economists and retailers as a revaluation of the Zimbabwean dollar. To support this new currency and spur economic growth hampered by high borrowing costs, the central bank has dramatically reduced interest rates from a world record of 130% to 20%. The ZiG has had a promising start, gaining 1.5% against the US dollar in just over a week of trading.
However, transitioning from the US dollar to the ZiG is fraught with challenges. One major concern is whether the new currency will create a parallel market, potentially threatening its stability. If the value of the ZiG fluctuates significantly in the informal sector, it could impact the prices of goods and services across the board, thereby influencing the official exchange rate. This potential for a dual currency system is something economic analysts and policymakers are closely monitoring.
The majority of Zimbabwe’s workforce is employed in the informal sector, which generates significant revenue but operates predominantly on a cash basis. This sector includes street vendors and small-scale traders who often avoid the high overhead costs associated with more formal retail spaces. Major retailers have felt the impact, with some attributing a decline in foot traffic to the prevalence of these informal markets.
