"Zimbabwe Lacks Fundamentals To Sustain New Currency"

Zimbabwean-born economist, Gareth Horsfield, says the recent introduction of a new currency, Zimbabwe Gold (ZiG) to replace the Zimbabwe dollar, is akin to putting the cart before the horse as the country does not have the conditions to sustain it.

Horsfield said that Zimbabwean authorities should first restore confidence in the financial system, put in place strong economic fundamentals, and increase production to reduce dependence on imports which drain foreign currency, among other things for a new currency to have any chance of success. He wrote:

Zimbabwe’s New Structured Currency: Putting the Cart Before the Horse

Introducing a new currency in a country comes with a complex set of challenges and considerations, particularly in an economy like Zimbabwe, which has faced significant financial instability over the years.

There are several reasons why introducing a new currency in Zimbabwe may not yield the expected outcomes or could potentially exacerbate existing economic issues.

Historical Context and Economic Instability

Zimbabwe has a history of hyperinflation, most notably from 2004 to 2009, which led to the abandonment of the Zimbabwean dollar in favour of a multi-currency system that included the US dollar and the South African rand.

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This history plays a crucial role in understanding the scepticism surrounding the introduction of a new currency.

Hyperinflation led to a loss of confidence in the local currency, making recovery and re-establishment incredibly difficult.

Lack of Confidence in the Financial System

Confidence in the financial system and the stability of a currency is crucial for its acceptance and functionality.

Given Zimbabwe’s history of hyperinflation, the public’s trust in any form of local currency has been severely eroded.

Introducing a new currency requires building this trust anew, a process that can take years, if not decades, of stable economic policies and practices, something Zimbabwe has struggled with.

Economic Fundamentals

For a new currency to be successful, there needs to be a strong and stable economic foundation. This includes a stable inflation rate, robust fiscal policies, and strong governance structures to manage the economy effectively.

Zimbabwe’s economy has faced challenges such as high unemployment, a decrease in industrial production, and governance issues that undermine the potential success of a new currency.

Dependency on Imports and Foreign Currency

Zimbabwe’s economy is heavily dependent on imports for basic goods and services, which necessitates a strong demand for foreign currency.

Introducing a new local currency could lead to a devaluation against stronger foreign currencies, increasing the cost of imports and potentially leading to inflation.

This reliance on imports and the need for foreign currency make it difficult for a new currency to establish itself as a stable medium of exchange.

Social and Political Challenges

The introduction of a new currency is not just an economic issue but also a social and political one. It requires the buy-in from various stakeholders, including businesses, the general public, and international partners.

In Zimbabwe, where political tensions and social unrest have been prevalent, achieving this consensus is challenging.

Political instability can further undermine confidence in any new currency, making its adoption and acceptance more difficult.

Comparative Examples

Looking at other countries that have successfully introduced new currencies, it is clear that certain conditions need to be met, such as political stability, strong economic fundamentals, and public confidence.

These conditions are not easily met in Zimbabwe’s current context, making the successful introduction of a new currency more challenging.

In conclusion, while the idea of introducing a new currency in Zimbabwe might seem like a potential solution to its economic problems, the realities on the ground present significant obstacles.

Historical economic trauma, lack of confidence in the financial system, unstable economic fundamentals, dependency on imports, and social and political challenges all contribute to the scepticism around the success of such a measure.

For a new currency to have any chance of success, Zimbabwe would need to address these underlying issues comprehensively and convincingly, a task that requires time, political will, and economic stability.

More: Pindula News