The market value of any entity — whether people, products, or currencies — is largely shaped by the forces of supply and demand.
This fundamental economic principle implies that to increase the value of a variable, one must first identify and strengthen the factors driving its demand. When it comes to currencies, particularly Zimbabwe’s ZWG, this understanding becomes critical.
Since gaining independence, Zimbabwe's local currencies have repeatedly faced severe challenges, seemingly caught in a perpetual cycle of economic hardship. To understand why the current ZWG may also fail, it is essential to examine how it functions — or fails to function — within the broader economic ecosystem.
A currency is expected to perform four key roles: as a unit of account, a store of value, a medium of exchange, and a standard of deferred payment. Historically, Zimbabwean currencies have struggled to function even as a basic medium of exchange, which has severely dampened demand. The ZWG faces significant obstacles in fulfilling its primary role as a medium of exchange. A legacy of hyperinflation, widespread economic instability, and a profound lack of trust in the Reserve Bank of Zimbabwe (RBZ) has rendered the currency unreliable. When a currency fails to maintain its value, people naturally abandon it in favour of more stable alternatives, such as the US dollar or the South African rand.
This pervasive lack of confidence creates a pernicious cycle where low demand leads to further depreciation, eroding any remaining value. In an economy where over 70% of activities occur in the informal sector, the preference for foreign currencies is even more pronounced. The ZWG is mainly accepted in the formal sector and reluctantly used in informal trade, covering only about 20% of the overall economy. To foster healthy demand for the ZWG, it would need to secure a foothold representing more than 20% of broad money.
For a currency to function as a unit of account, it must offer a stable benchmark against which goods, services, and assets can be valued. The ZWG, like its predecessors, has failed in this respect. Volatile exchange rates and rampant inflation have made Zimbabwean currencies unreliable for pricing. This has led traders in both the formal and informal sectors to price goods in US dollars, converting them to ZWG based on the prevailing exchange rate each day. One of the most critical functions of a currency is to act as a store of value — allowing people to save money without the fear of losing purchasing power. Unfortunately, Zimbabwe’s history of hyperinflation has devastated this function.
Savings in local currency rapidly lose value, prompting people to exchange their wealth for foreign currencies or tangible assets. This exodus from the ZWG further reduces its demand and, consequently, its value. Another key role of a currency is to serve as a standard of deferred payment, making it reliable for future transactions, including loans and contracts. However, the volatility of the ZWG makes it unsuitable for such commitments.
On September 27, 2024, just five months after the introduction of the ZWG, the RBZ devalued the currency by a staggering 43% on the interbank market in an attempt to curb an exchange premium that had swelled to over 120% amid soaring parallel market rates. Given this unpredictability, who would willingly enter into a long-term contract in a currency that could lose half its value overnight? This lack of confidence in the currency’s future worth further suppresses its demand.
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All these functions depend on two key elements: economic stability and public confidence.
In Zimbabwe's case, political instability, economic mismanagement, and a lack of transparent policies have eroded both. Beyond addressing the functional shortcomings, restoring demand for the ZWG will require sweeping reforms aimed at rebuilding trust and ensuring consistent economic policies that promote stability. Without tackling these core issues, the ZWG is likely to repeat the failures of its predecessors. Without bold and sustained economic reforms, the ZWG, like previous Zimbabwean currencies, will remain a symbol of the nation’s ongoing economic struggles.
Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma_
