Local Currency Devaluation Exposes the Fragility of Zimbabwe’s Economy 

By Nevison Mpofu

As the business day was fast approaching its end on Thursday, 26 September, the Reserve Bank of Zimbabwe (RBZ) updated its website with a mid-rate which pegged the local currency, Zimbabwe Gold (ZiG), as 24.3902 to the dollar. The move effectively represented a sharp 43% devaluation of the ZiG.

In the weeks leading up to the currency devaluation, the parallel market rate was sharply increasing hence necessitating citizens with free funds to shop for arbitrage opportunities when exchanging their free funds (forex) to the local currency. Supermarkets and other merchants, on the other hand, in an attempt to hedge themselves, spiked prices. This, in essence, made most basic services out of reach for many citizens.

The move taken by the RBZ was thus a reaction to the sustained pressure on the currency. While Zimbabwe has had several local currencies over the past years, all of which have failed, ZiG’s initial valuation has come at a much faster pace. Many economic analysts who have publicized their views say that the devaluation of the currency, and most probably its failure in the near future, was evident even when the currency was launched back in April 2024. Economists say the currency was launched at a time when the requisite fundamentals weren’t in place.

One of the fundamentals that economists pointed out is the overreliance on the use of the US dollar. Zimbabwe is currently using a multi-currency system. Of all the currencies that are designated as legal tender, it’s the US dollar that’s being widely used. While many citizens prefer using the US dollar, economists state that the use of the US dollar affects the country’s productivity levels as cheap imports flock in. If the economy is to rebound, economists state that the country should use the local currency more.

Adding to the woes of the absence of key fundamentals required to sustain the local currency, when ZiG was launched in April, the government decided to peg some of its services, such as passports, purely in US dollars. The government also offered fuel operators the discretion to charge using the US dollar only something which created a huge demand for the forex. Moreover, attaching huge fees for local currency electronic transactions also pushed away citizens from loving and using the ZiG.

Despite the presence of several challenges and a lack of interventions to address the highlighted fundamentals that are needed for the success of the local currency, the RBZ said the devaluation of the local currency on its own is an intervention that will stabilize the economy and put it on a transformative path. In a statement, the central bank said, “The MPC is convinced that the above measures will go a long way in addressing the emerging exchange rate risks, anchor the inflation expectations, and stabilize prices in the near to short term.”

Economist Hapi Zengeni said despite the presence of a plethora of challenges that threaten the success of the local currency, the one main thing that guarantees the stabilization of the currency that the RBZ is failing to do is to let the currency float freely rather than to control the exchange rate. In a statement, she said the absence to specify whether it will allow the currency to float “highlights the complexities in Zimbabwe… where the official exchange rate does not reflect the realities of the parallel market, leading to more challenging economic implications for trade, investment, and more importantly consumer behavior.”

The RBZ Governor John Mushayavanhu and President Mnangagwa both stated that while the devaluation exercise was necessary for the country’s economic fortunes, its main effect was eroding the value of workers’ salaries. On this front, both President Mnangagwa during his State of the Nation (SONA) address, and RBZ Governor during his address to the media said they have plans to increment the salaries of civil servants. They also said that the 13^th (yearly bonus) paycheck for civil servants, which is traditionally paid in November, will be paid in US dollars. The private sector is expected to emulate this.