KEY POINTS
- Zimbabwe’s foreign-currency reserves rise to $509 million amid higher ZiG demand.
- Tight liquidity and high interest rates drive ZiG appreciation.
- Post-devaluation inflation surged to 37.2 percent in October.
Zimbabwe’s foreign-currency reserves have reached $509 million, spurred by rising demand for the local currency, the ZiG, as businesses increasingly liquidate foreign holdings.
This rise follows strategic monetary moves by the Reserve Bank of Zimbabwe, including a notable interest rate hike, according to Governor John Mushayavanhu.
Demand for ZiG strengthens local currency
Governor Mushayavanhu, speaking to The Sunday Mail, credited the recent gains in Zimbabwe’s foreign-currency reserves to economic agents’ heightened willingness to convert their foreign holdings into ZiG.
This shift has created favorable conditions for the local currency, which rose to 25.60 per dollar last week, marking its first weekly gain since a significant devaluation in September.
“Tight liquidity conditions in the market, combined with a firm monetary policy, have encouraged this trend,” Mushayavanhu said.
In September, the central bank raised its benchmark interest rates from 20 percent to 35 percent. Since then, the local currency has shown signs of appreciation as more businesses embrace it in transactions.
As of November 6, Zimbabwe’s local currency reserves stood at about ZiG 3.4 billion ($129 million), alongside foreign-currency reserves totaling $509 million, underscoring a shift toward increased local currency liquidity.
Interest rate hike and devaluation’s role in currency performance
The ZiG, Zimbabwe’s latest attempt to stabilize its currency, was introduced in April as a gold- and reserve-backed unit aimed at reducing dependency on foreign currencies. This is Zimbabwe’s sixth attempt to stabilize a national currency in the past 15 years.
According to New Zimbabwe, in September, the central bank devalued the ZiG by 43 percent while simultaneously hiking interest rates, a dual approach designed to restore value to the currency.
This devaluation, however, caused inflation to surge. October’s inflation rate hit 37.2 percent, a sharp rise from 5.8 percent in September, raising concerns about the long-term impact on the economy.
Despite these challenges, Mushayavanhu’s confidence in the current policies underscores the central bank’s commitment to strengthening the local economy through monetary controls.
Outlook for Zimbabwe’s financial stability
This, confirmed by the support of strategic monetary policy and the growing confidence of the local entrepreneur to invest in ZiG shows a cautious optimism towards the economic stability of Zimbabwe.
As the usage of this currency gains acceptance globally, the central bank believes that exchange rate stability will be achieved with the backdrop of adequate reserves.
The expansion of the ZiG’s presence in Zimbabwe’s financial market is progress for the Zimbabwe dollar although there is more work to be done.
The fact that devaluation from September still affects inflation shows how careful countries should be in trying to achieve growth so as to protect the value of the currency.
