Zimbabwe’s central bank has significantly bolstered its foreign exchange reserves by 30% in the last three months, providing a welcome buffer for the country’s recently introduced currency, the Zimbabwe Gold (ZiG).
The reserves, which include cash and mineral royalties in the form of diamonds, lithium, and platinum, have grown from $285 million to over $370 million according to John Mushayavanhu, the governor of the Reserve Bank of Zimbabwe. This increase comes after a policy introduced in September 2022 requiring mining firms to pay half their royalties in commodities.
“As a result, the total reserves have progressively increased about 30% from $285 million as of April 5th” to above $370 million as of the end of June,” Mushayavanhu revealed in a press conference.
The ZiG, launched in April 2024, replaced the Zimbabwe dollar which had suffered significant depreciation against the US dollar. This depreciation eroded public confidence in the local currency, making it difficult for businesses to plan and consumers to save. The central bank hopes the increased reserves will bolster confidence in the new currency and promote stability.
Building a Buffer
Zimbabwe’s economic history is marked by periods of hyperinflation, leading to the collapse of the Zimbabwean dollar in 2009. The introduction of the ZiG, backed by a basket of foreign currencies and minerals, aims to prevent a similar scenario.
The central bank’s strategy of accumulating reserves through mineral royalties offers a two-fold benefit. First, it strengthens the backing for the ZiG. The increased reserves provide a larger pool of resources to intervene in the foreign exchange market if necessary, stabilizing the exchange rate. This stability is crucial for businesses that import goods and for citizens who rely on remittances from abroad.
Second, the strategy diversifies the country’s foreign exchange holdings. Previously, Zimbabwe relied heavily on a single currency, the US dollar. This dependence left the economy vulnerable to fluctuations in the value of the dollar. By accumulating a basket of currencies and minerals, the central bank aims to mitigate these risks.
A Look Ahead
The initial success of the ZiG hinges on maintaining confidence in the currency. The central bank’s commitment to accumulating reserves is a positive step. However, long-term stability will also depend on broader economic reforms.
Zimbabwe must address inflation, which remains a significant concern for citizens. High inflation erodes purchasing power and discourages investment. The government needs to implement policies that control money supply and stimulate domestic production.
Additionally, fostering economic growth is crucial. A growing economy generates more government revenue and creates jobs. This, in turn, increases tax collection and reduces reliance on foreign aid.
Economists remain cautiously optimistic about the future of the ZiG. “The increase in reserves is a positive development,” says Dr. Tendai Ncube, a professor of economics at the University of Zimbabwe. “However, the true test will be how the central bank manages the currency over time. Maintaining fiscal discipline and implementing growth-oriented policies will be critical for long-term success.”
Other experts highlight the importance of transparency. “The central bank needs to be transparent about its monetary policy decisions,” says Mr. Tafara Moyo, an independent financial analyst. “This will help to build trust in the new currency and encourage wider adoption.”
The strengthening of reserves is a significant step towards stabilizing Zimbabwe’s economy. However, the long-term success of the ZiG hinges on the government’s commitment to broader economic reforms.
Source: New Zimbabwe
