IN the intricate landscape of emerging economies, monetary policy serves as a critical instrument wielded by central banks to navigate the turbulent waters of currency volatility and inflationary pressures.
The year 2024 presented Zimbabwe and Nigeria with formidable economic challenges, prompting both nations to adopt tight monetary policy stances aimed at stabilising their currencies and curbing speculative trading. However, an analysis of the outcomes reveals a complex tapestry of unintended consequences, where efforts to rein in inflation inadvertently suppressed economic activity and eroded asset values in real terms.
Zimbabwe and Nigeria are two nations whose struggles with hyperinflation, currency collapse, and equity market volatility laid bare the limitations of monetary policy in fractured economies. Both countries embarked on aggressive tightening measures to stabilise their currencies, curb speculative trading, and restore investor confidence.
Yet, their experiences revealed a paradox: nominal gains in equity markets were rendered illusory by catastrophic currency depreciation, while contractionary policies designed to suppress inflation instead deepened systemic vulnerabilities.
Zimbabwe’s economic trajectory in 2024 was a harrowing saga of institutional failure and policy improvisation. Between January and April 5, 2024, the Zimbabwe dollar (ZW$) had already lost 80% of its value against the US dollar on the interbank market. This freefall, rooted in years of hyperinflation and fiscal mismanagement, prompted the Reserve Bank of Zimbabwe (RBZ) to introduce the Zimbabwe Gold (ZiG).
Pegged to the country’s gold reserves, the ZiG was marketed as a stable alternative to the discredited ZW$. However, the currency’s debut was disastrous, depreciating by 47% against the US dollar from inception on April 5, 2024 to December 31, 2024, exposing the RBZ’s inability to manage market expectations.
In response, the RBZ imposed draconian monetary restrictions, raising interest rates and curtailing money supply growth to deter speculative trading. While these measures initially slowed activity on the Zimbabwe Stock Exchange (ZSE), they failed to address the structural drivers of currency weakness.
By September 2024, the parallel market premium (the gap between the official ZiG rate and the black-market rate) had ballooned to over 100%. This disparity forced the RBZ to abandon the gold peg on September 27, allowing the ZiG to float freely by devaluing the currency by over 40% in one day.
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The devaluation triggered a currency freefall, abruptly wiping out nominal gains on the ZSE All Share Index when converted to real terms. For instance, while the index posted a nominal return of 117,6% in local currency terms in 2024, this translated to a mere 14,4% in USD terms, underscoring the erosion of real value.
Meanwhile, Nigeria’s experience in 2024 mirrored Zimbabwe’s reliance on monetary policy tightening to combat currency instability, albeit with marginally stronger institutional foundations. The Nigerian Naira (NGN) depreciated by 41% against the US dollar, a collapse driven by falling oil revenues, speculative forex hoarding, and structural imbalances in the Central Bank of Nigeria’s (CBN) exchange rate management.
Headline inflation soared significantly in 2024, amplifying pressures on households and businesses. In response, the CBN pursued a relentless hawkish stance, regularly raising the Monetary Policy Rate (MPR), and by September 2024, the rate had been raised five times while tightening liquidity to deter speculative borrowing. On the surface, Nigeria’s equity market appeared resilient.
The NGX All Share Index surged 38% in nominal terms, buttressed by local investors seeking a safe haven against inflation in stocks. However, this nominal growth masked a stark reality. When converted to US dollars, the index dwindled by 20%, reflecting the naira’s depreciation. Foreign investors, who dominate Nigeria’s equity trading, faced steep losses, triggering capital flight into safer instruments such as treasury bills, which offered yields upwards of 20%.
The CBN’s policies also exacerbated fiscal strain as higher interest rates inflated government debt servicing costs, which consumed nearly 45% of federal revenue by mid-2024. Meanwhile, the parallel market premium persisted at 30%, a testament to the failure of monetary tightening to resolve underlying foreign currency illiquidity.
Nigeria’s predicament highlighted a critical paradox similar to Zimbabwe that while contractionary policy stabilises nominal asset prices temporarily, it deepens systemic vulnerabilities by stifling private sector credit and foreign investment.
Zimbabwe and Nigeria’s 2024 crises shared a common thread which borders around the futility of tight monetary policy in economies plagued by structural weaknesses. Both central banks prioritised curbing speculation over addressing root causes like fiscal deficits, commodity dependency, and institutional opacity. However, their approaches diverged in key ways, offering lessons for emerging markets navigating similar turbulence. Zimbabwe’s initial attempt to peg the ZiG to gold reserves was a novel but flawed strategy.
While gold-backed currencies can theoretically instill confidence, the RBZ’s initial lack of reliable disclosure of reserve adequacy and its abrupt policy reversal in September 2024 shattered credibility. In contrast, CBN adhered to orthodox monetary tools that include rate hikes and liquidity tightening but resisted a clean float of the Naira, perpetuating distortions in the foreign currency market. Both approaches failed, but Zimbabwe’s eventual shift to a free float, though chaotic, aligned the ZiG closer to market realities, whereas Nigeria’s reluctance to fully liberalise the naira prolonged investor uncertainty.
The divergence between nominal and real returns in both countries’ stock markets underscored the perils of inflation-driven equity rallies. In Zimbabwe, the ZSE All Share Index’s 117,6% nominal return in 2024 (14,4% in USD terms) paled in comparison to its 2023 performance (982% nominal, 21% USD), reflecting the ZiG’s instability. Nigeria’s NGX Index mirrored this trend: a 38% nominal gain became a 20% loss in USD terms. These figures reveal a grim truth that in hyperinflationary environments, equities act as a “temporary” hedge for local investors but fail to preserve value for foreign or USD-based stakeholders.
An underlying issue in both countries is the disconnect between official exchange rates and market realities. Administrative controls and pegged rates failed to reflect true demand and supply dynamics, leading to the proliferation of parallel markets. Meanwhile, parallel markets provided more accurate price signals, albeit at the cost of widening exchange premiums and fostering an environment ripe for arbitrage and speculation.
Nonetheless, the experience of the ZSE and NGX underscores the limitations of relying solely on tight monetary policy to achieve currency stability and economic growth. The suppression of economic activity through high interest rates and restricted liquidity can stifle economic growth, exacerbate unemployment, erode asset values in real terms and consequently undermine investor confidence; potentially leading to capital flight and reduced foreign investment, yet both are critical components for emerging economies.
A potential resolve lies in embracing a more flexible monetary policy coupled with market-determined exchange rates. Allowing currencies to float freely enables exchange rates to adjust in response to market conditions, reducing the distortions created by artificial pegs. While this approach may introduce short-term volatility, it promotes transparency and can enhance investor confidence over the long term. Importantly, it must be supported by robust fiscal policies and structural reforms aimed at addressing the root causes of economic instability.
Furthermore, in a bid to break the cycle of currency crises and equity market disillusionment, Zimbabwe, Nigeria, and similar economies must adopt holistic strategies. Central banks ought to coordinate with governments to synchronise monetary tightening with fiscal consolidation, something that has been lacking in Zimbabwe due to possible political reasons.
For Nigeria, this means phasing out fuel subsidies and boosting tax compliance; for Zimbabwe, auditing gold reserves (something the RBZ has already done for 2024 through BDO), increasing acceptability of local currency as a medium of exchange, boosting tax compliance and curbing illicit financial flows holistically. Transparent exchange rate mechanisms, coupled with clear communication from central banks, reduce speculative frenzies.
Nigeria should dismantle foreign currency restrictions, while Zimbabwe must rebuild trust through independent reserve audits.
- Equity Axis is a financial media firm offering business intelligence, economic and equity research. The article was first published in its latest weekly, The Axis.
