The Zimbabwe ZiG currency has stabilized a bit in the past few weeks, helped by the central bank actions and higher gold prices. The official USD/ZIG exchange rate was trading at 25.6 on Monday, down from the year-to-date high of almost 30.
According to ZimPriceCheck, the black market rate was about 40, which is still significantly higher than the all-time low of below 15.
Higher interest rates
The Zimbabwe ZiG has rallied because of the recent actions by the central bank that have made it more resilient.
In a statement last week, the central bank left interest rates at 35%, the highest level in Africa. It also signaled that it would maintain higher rates for longer to deal with the elevated inflation rate in the country.
Zimbabwe is still seeing elevated inflation in the country because of the relatively weaker local currency. While it has stabilized a bit recently, it remains significantly weaker than where it was trading in April when it was launched.
Most of the Zimbabwe ZiG’s crash happened after the central bank devalued it by about 40% in September. The goal of this devaluation was to reduce the spread between the official and the black market interest rates in the country.
Higher interest rates in Zimbabwe have helped to boost the ZiG by making it an attractive currency for investors. The most recent data showed that consumer prices in Zimbabwe rose 11.7% in November after jumping by 37.2% in October.
Investors are therefore optimistic that investing in Zimbabwe’s bonds or money market funds will bring positive returns, at least in the short term.
Read more: From 13.5 to 40: Here’s why the Zimbabwe ZiG is imploding
Higher gold prices
The Zimbabwe ZiG currency has also improved because of the rising gold prices. Gold was trading at $2,640, a few points below the year-to-date high of $2,787.
Analysts are optimistic that the price of gold will continue doing well in the long term because of the rising US public debt. Data shows that the national debt has jumped to over $36.2 trillion and could end the year at over $36.5 trillion. If this trend continues, then the debt will get to $40 trillion in the next few years.
Gold is often seen as a better alternative to the US dollar in terms of its role as a reserve currency. This explains why many governments have continued to accumulate gold this year.
The Zimbabwe ZiG is backed by gold and the US dollar. As such, its value tends to do well when the price of gold is doing well.
Zimbabwe ZiG risks remain
The Zimbabwe ZiG still faces substantial risks ahead. The biggest risk is that of confidence since the country has had multiple currencies in the past few decades. All these currencies always collapse. The most recent one was the RTGS Zimbabwe dollar, which fell by 80% in the first three months of the year.
Many Zimbabweans have seen their savings in local currencies evaporate and are unwilling to save in the currency. As a result, the US dollar demand has remained significantly higher since it accounts for over 70% of all transactions in the country.
Analysts also cite the fact that the government will ultimately need more money and fuel the printing of the cash. Unlike many other countries, Zimbabwe has limited foreign reserves and it often lacks access to external markets.
Additionally, maintaining a currency peg is one of the most difficult things, especially if you don’t have adequate reserves. The Hong Kong dollar peg has held steady over time because of the city’s substantial foreign reserves.
Therefore, while the Zimbabwe ZiG has improved recently, there are rising odds that it will resume the downward trend in the longer term.
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