Zimbabwe currency plunges after Central bank move to allow more flexibility

Harare, Zimbabwe-The value of zimbabwean’s gold backed currency plunged 44% Friday on the official market.

The sudden drop of the gold backed currency, known as ZiG, begin Friday shortly after the Reserve Bank of Zimbabwe’s monetary committee met and bank governor John mushayavanhu said that after looking at, the recent microeconomic and financial developments and economic Outlook, the bank was ready to allow greater exchange rate flexibility, in line with the increased demand for foreign currency in the economy.

Immediately after, the ZiG started trading at 25 to 1 US Dollar, done from 14 where it had been since it was introduced in April

Tapiwa Mupandawana, a Zimbabwean independent economist and doctoral student at Africa Research University in Zambia said allowing the ZiG to plunge is an adjustment towards its real value and a reflection of the actual state of Zimbabwe’s economy.

The value of a currency is the derivative of the productive capacity of the country Mupandawana said so in any case you cannot have a stable currency if you do not have a stable economy.

Prosper Chitambara , senior economist with the labor and economic Development Research Institute of Zimbabwe, said the decision to allow the ZiG to drop could be positive for the economy and a sign the Central Bank is allowing market forces to play more of a role in determining the value of the country’s currency.

“(It) should you have some stabilizing effect on the exchange rate,” Chitambara said. “I don’t think it is going to have a major impact in terms of pricing on the economy, given that most businesses were already indexing their ZiG pricing based on the parallel market or based on the black market premium.”

The gold-backed ZiG is the 6th type of currencies Zimbabwe has tried to use since the Zimbabwean dollar collapsed amid hyperinflation in 2009 after Friday’s official devaluation, the ZiG was trading at around 50 on the black market. Before Friday it was trading at 35 ZiG to 1 U.S dollar.