Zimbabwe, probably more than any country in the world save Venezuela, has over the decades been trapped in uncontrolled inflation.

Indeed, Zimbabweans still remember the horrific hyperinflation that destroyed their savings and turned their economy upside down between 2007 and 2009. Yet once again, the economy is threatened with utter failure from uncontrollable price increases.

This time the government is responding with an initiative to boost confidence in the form of a currency that is at least nominally backed by gold. Alas, it seems doomed to fail.

Living Down the Past

The ZiG (short for Zimbabwean Gold) replaced the Zimbabwean dollar last month. The question now is whether people will be willing to use the ZiG as a store of value and medium of exchange, now that it is linked to the precious metal. But judging simply from historical experience, the odds of success don’t seem high. This, after all, is Zimbabwe’s sixth attempt since 2008 to create a stable currency of its own.

Global economic shocks — remember the Great Recession — combined with the government’s miscalculations led to Zimbabwe’s collapse into hyperinflation in 2007-9. Harare, unable to manage agricultural disasters and plummeting exports, ordered the Reserve Bank of Zimbabwe to use the printing press to fund its operations. In mid-November 2008, the monthly inflation rate hit 79.6 billion percent, which thanks to the miracle of compounding works out to an annual rate of 897,000,000,000,000,000,000 percent. (That, incidentally, was the second-highest hyperinflation rate ever recorded. The record? Hungary in 1946.) 

The Zimbabwean dollar became worthless, forcing individuals to barter commodities or to conduct transactions in foreign currencies. Many emigrated — mostly to South Africa, which has an appetite for cheap labor.

Initially, Harare tried to curb inflation with price controls, but this proved about as effective as stopping the Russian Army  with a stern lecture. The government subsequently ditched the Zimbabwean dollar and formally allowed the use of foreign currencies, such as the U.S. dollar and the South African rand. This measure stabilized the economy and provided relief from hyperinflation.

Then, in 2015, the government demonetized the Zimbabwean currency entirely, buying back the paper for $5 per wheelbarrow-load, and set a goal of formally adopting the U.S. dollar as Zimbabwe’s currency. And it worked in its primary goal: inflation averaged only 2.1 percent between 2010 and 2018. Meanwhile, GDP per capita increased at a delightful 5.4 percent average annual rate.

No good deed, it seems, goes unpunished. Despite this remarkable economic turnaround, Harare reintroduced the Zimbabwean dollar (ZWL) in 2019 and prohibited the use of foreign currencies as legal tender. It was not long after that inflation came back out of the shadows.

The central bank attempted to control the incipient inflation by conventional means, tightening monetary policy and rising interest rates. Despite these efforts, inflation averaged 354 percent annually between 2019 and 2023. While not hyperinflation, that’s far too high a rate to operate an economy efficiently. And to no one’s surprise, GDP per capita fell (at a rate of almost 1 percent annually). 

Meanwhile the government treasury buckled under the pressure of deficit finance, borrowing to cover the gap. Government debt as a percentage of GDP nearly doubled to 100 percent of GDP in 2022.

The ZWL’s depreciation against stable foreign currencies accelerated. In May 2023, a U.S. dollar bought 1,070 ZWLs. Eleven months later, the same dollar bought 30,000 ZWLs. Inflation hit 55 percent per month in March — perilously close to anyone’s definition of hyperinflation. Plainly, something had to be done.

That something came down to two unpalatable options: return to a U.S. dollar standard, or try a gold standard, which had the virtue of not sounding like colonialism. Enter the ZiG, which is literally denominated in milligrams of gold. Individuals with physical gold coins can convert them (if they wished to do so) into gold-backed digital tokens via the banking system. They can also keep ZiG in electronic wallets or cards to trade and make payments.

Indeed, in conception, the ZiG has many similarities to a central bank digital currency, and the Bank of Zimbabwe apparently hoped that the ZiG would be a stepping stone to a true central bank digital currency. But at the risk of exposing you to another cliché, what could possibly go wrong?

Unfortunately, there are several likely possibilities. In the short run, and to nobody’s surprise, there is a yawning confidence gap in the new currency, making Zimbabweans reluctant to treat it as a stable store of value. Is there really enough gold to swap one-for-one with the ZiG with anyone who asks? By the same token, there is skepticism about the ZiG’s international acceptance, particularly in cross-border trade and payments.

The official exchange rate was fixed at 13.56 ZiG per USD on April 8, when it started trading. However, two weeks later the ZiG was trading at just 20 ZiG per USD on the black or parallel market. In attempts to enforce ZiG usage, authorities were arresting money traders and closing some business accounts for allegedly dealing only in U.S. dollars.

Moreover, the Zimbabwe Stock Exchange wasted no time in reflecting these doubts, with stock prices down sharply in the wake of the introduction of the new currency. By April 24, paper gains in the stock market of over 330 percent for the calendar year to date had been utterly wiped out.

While gold (2.5 tons) and a basket of stable foreign currencies ($100 million) support the ZiG, Zimbabwe hardly has enough reserves to exchange the new currency for gold or dollars on demand. The GDP, after all, is in the range of $30 billion. And it wouldn’t take too much asking to strip the cupboard bare since the ZiG supply at current exchange rates is hundreds of times larger than the backing on hand.

On a more fundamental level, just establishing a new currency does not address Zimbabwe’s underlying economic issues, which are daunting. The ZiG’s efficacy depends partly on significant political and institutional reforms. Corruption, government  inefficiency and a lack of openness impede economic recovery and stability. In March, the U.S. Treasury imposed sanctions on Zimbabwe’s president, Emmerson Mnangagwa, first lady Auxillia, and 11 other government officials for corruption — which will not help to instill confidence in the new currency. And without addressing these underlying factors, it is difficult to imagine the ZiG being willingly held as a store of value.

The Reserve Bank of Zimbabwe’s commitment to more conventional monetary policies — its will to hold the line on inflation — is critical to the ZiG’s success. However, there are questions regarding the central bank’s ability to withstand political meddling, notably in creating money to pay the government’s bills. The IMF observes that in prior instances of accelerating inflation the Bank failed in this task.

With the boost in the form of partial backing in gold and hard currency, the ZiG may briefly muddle along. But if the government maintains its reliance on gold — that is, tying the value of the ZiG to the world market price of the precious metal — it will lack an autonomous monetary policy. And though the central bank encourages the use of ZiG as legal tender, the U.S. dollar has continued to account for 80 percent of transactions in Zimbabwe.

Simply put, the ZiG is virtually all sizzle and no steak, an experiment in regaining public trust in the national currency that will almost certainly fail. The practical alternative is to stop trying, to accept (for the time being anyway) that the best of problematic alternatives is to formally adopt the U.S. dollar as Zimbabwe’s currency — as it did de facto between 2010 and 2018, and as Panama, El Salvador and Ecuador have done in the past with varying degrees of success.

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Dollarization has limits. Among the most obvious, it amounts to an acknowledgment that the government can’t be trusted to put currency stability ahead of other priorities. But in light of Zimbabwe’s wretched history with inflation, it is hard to see a better alternative.