USD/ZIG: Zimbabwe Gold steady after central bank decision

The USD/ZIG exchange rate has remained relatively stable this month as the use of the Zimbabwe Gold continues. According to the Zimbabwe Central Bank, the pair was trading at 13.68 on Wednesday, where it has been in the past few weeks.

The Zimambwe ZiG reacted mildly to Thursday’s interest rate decision by the central bank. In it, the bank decided to leave interest rates unchanged at 20% as it continues to observe the ongoing currency stability. 

The decision came at a time when data revealed that inflation was moving in the right direction because of the ZiG. According to the statistics agency, the headline inflation dropped by 2.4% in May and the central bank expects that the trend will continue. It sees the headline inflation to move below 5% by December.

Meanwhile, Zimbabwe has continued negotiations with the International Monetary Fund (IMF). A team from the agency has visited the country to assess the impact of the ZiG and discuss Zimbabwe’s $19.2 billion arrears to key institutions like the IMF, World Bank, and Africa Development Bank. 

Still, as I have written before, there are concerns about the currency, which is Zimbabwe’s sixth. Before its launch, the RTGS Zimbabwe dollar collapsed by almost 100% from its launch a few years earlier.

The main concern is whether the Zimbabwean government will start printing the currency to fund its budget as it has done in the past. There are also concerns about its backing since it is backed by 2.5 tons of gold and $100 million in cash. 

For the currency to work as envisioned, Zimbabwe will need to continually add gold and cash to back it up. As we have seen before with currencies like the Hong Kong dollar, maintaining a peg is often highly expensive.

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