Zimbabwe's local currency, the ZiG, is teetering on the edge of failure, not due to rapid devaluation, but rather growing irrelevance, according to Imara Asset Management, the country's oldest independent brokerage. The currency, launched a year ago, is backed by 2.5 tons of gold and $100 million in foreign currency reserves held by the central bank. However, it has failed to gain public confidence, and authorities' efforts to encourage widespread adoption have largely been ineffective.

This marks Zimbabwe's sixth attempt in 15 years to establish a stable local currency. Despite its gold backing, the ZiG's value has declined, and about 80% of transactions in the country are still conducted in U.S. dollars, with some also made in South African rand. Last year, Zimbabwean President Emmerson Mnangagwa declared that the ZiG would become the sole legal tender by 2030, phasing out the existing multicurrency system.

The Imara report attributes the ZiG's downfall to policy missteps and a prolonged liquidity crunch, which has persisted for six months. Unlike past currency collapses driven by hyperinflation, the ZiG's failure is being shaped by these factors. The central bank's strategy, particularly its decision to raise interest rates to support the ZiG and fight inflation, is backfiring by encouraging more people to rely on the U.S. dollar.

Persistence Gwanyanya, a member of the Reserve Bank of Zimbabwe's monetary policy committee, disputed the Imara report, stating that the liquidity issues are limited to the parallel market, and not the formal banking system. However, Imara executives argue that monetary policy alone won't solve Zimbabwe's economic challenges, and the government needs to focus on boosting revenues and curbing deficit spending.

In a blunt conclusion, the Imara executives suggested that it would be better simply to scrap the ZiG and move on. This raises concerns about the future of Zimbabwe's economy and the potential implications of abandoning the local currency. The situation highlights the need for a comprehensive approach to address the country's economic challenges, rather than relying solely on monetary policy.

The failure of the ZiG would have significant implications for Zimbabwe's economy, including potential hyperinflation, reduced investor confidence, and increased poverty. It is essential for the government to take a holistic approach to address the country's economic challenges, including implementing fiscal discipline, promoting economic growth, and enhancing the business environment.

The story of the ZiG serves as a cautionary tale for other African countries struggling to establish stable local currencies. It highlights the importance of careful planning, effective policy implementation, and a comprehensive approach to addressing economic challenges. As Zimbabwe navigates this critical period, it remains to be seen whether the government will take the necessary steps to address the country's economic woes and restore confidence in the local currency.