Can the ZiG Deliver Price Stability?




- By Chinedu Okoye



Introduction:

On April 30th, Zimbabwe introduced its new currency, the ZiG (Zimbabwean Gold), in a bid to halt the uncontrollable inflationary spiral that had reached 57% in the same year. This marks the country's sixth attempt at a currency change since 2008, and it comes with complementary monetary and international policies.



The ZiG As An Essential Monetary Policy Intervention:

The ZiG can be viewed as a monetary policy intervention aimed at addressing the hyperinflation and economic instability that characterized the Zimbabwean dollar era. In our previous article, we discussed the monetary policy effects of the gold-backed currency, including its impact on money supply and the complications of price targeting, as ZiG prices could be distorted from gold prices.

Prices under the ZiG:

Since its introduction, businesses have been selling at inflated prices equivalent to the US Dollar value of the ZiG. These higher prices can be seen as a necessary adjustment to achieve price stability and anchor expectations. Contrary to attributing this to the currency switch, we view this adjustment as an initial price level adjustment, akin to a monetary policy shock, aimed at correcting the distortions created by the previous monetary regime.



A Necessary Adjustment:

By introducing a new, gold-backed currency, the government has effectively reset the price level to a more sustainable trajectory, aligning it with the fundamental value of the economy. This can also be seen as an insurance, or a necessary cost, in switching from a more trusted US Dollar, from traders worried about the ZiG costs of restocking their inventory. 

This adjustment is necessary to correct the country's terms of trade, which had been distorted by the Zimbabwean Dollar era. By allowing prices to adjust to their equilibrium level, the economy is effectively correcting the misallocations and inefficiencies that had arisen under the previous currency.

A Step towards Price Stability:

Though the higher prices in ZiG may seem counterintuitive at first, they can be seen as a necessary step towards achieving price stability and promoting sustainable economic growth. Future price changes will be monitored and are expected to moderate as the currency maintains its level against the greenback.



Caveats and Challenges:

While a robust gold reserve is supposed to bring stability to the currency, its value will still be driven by balance of payments. This means that the currency is far from fail-proof, and its success will depend on a combination of factors, including monetary policy, international trade, and economic fundamentals.



Conclusion:

Zimbabwe's new currency, the ZiG, marks a bold move to tame inflation and promote economic stability. While it comes with challenges and uncertainties, it has the potential to reset the economy on a more sustainable trajectory. As the country embarks on this new monetary regime, it will be important to monitor its progress by looking at price stability as that would influence investor decision making and give credibility to the new legal tender.

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