Zimbabwe has lost more than $3 billion in potential revenue due to exchange rate distortions in three years, in a major indication of the huge costs Harare is paying for having an unstable currency, World Bank research has shown.

The Southern African country this year made a sixth attempt to re-establish its own currency after it was forced into dollarisation 15 years ago.

President Emmerson Mnangagwa’s government introduced the Zimbabwe Gold (ZiG) currency in April this year to replace the Zimbabwe dollar, which had been relaunched in 2019 to deal with hyperinflation inflation.

At the time the central bank said the new currency was backed by 2.5 tonnes of gold and foreign currency reserves.

Six months later, the new currency is on a free fall and is already trading at $1 to ZiG30 on the more popular parallel foreign currency market after the authorities fixed the rate at $1 to ZiG13.5 when it was introduced.

Read: Zimbabwe’s new currency faces headwinds five months on

According to the joint research by the World Bank and Confederation of Zimbabwe Industries (CZI) whose findings were released this week, Zimbabwe’s Treasury lost $3.15 billion in potential revenue between 2020 and 2023 due to its handling of the exchange rate. 

The research titled ‘The Fiscal Costs of Monetary and Exchange Rate Distortions in Zimbabwe’ shows that $1.5 billion was lost to informalisation of the economy and additional losses attributed to the overvalued currency as well as payments that were hit by inflation.

Researchers said these distortions, driven by inflation and an overvalued exchange rate, have significantly impacted tax revenue, industry growth and the informalisation of the private sector.

“In total, $3.1 billion was lost due to the currency distortions,” said one of the researchers Carren Pindiriri, who added that the figures may be conservative. “The analysis suggests that informalisation (of the economy) resulted in a loss of at least $1.15 billion between 2020 and 2023.” 

“Inflation has continued to trouble the country: year-on-year inflation had surpassed 700 percent by the end of 2023. By April 2024, the official exchange rate had depreciated by more than 95 percent since December 2023, the parallel market gap was over 30 percent.”

Eddie Cross, a prominent economist and President Emmerson Mnangagwa’s adviser, suggested that the introduction of the new currency had not solved Zimbabwe’s old exchange rate problems, which are getting worse.

“The problems we face are multiple,” Mr Cross said. “We have issued a new currency, the ZiG, and stated that we would defend it at all costs. We are losing that battle and the currency is already 80 percent depreciated. If we do nothing fundamental, it is, like its predecessors doomed.”

“Arbitrage opportunities are back, the formal sector is in deep trouble, the informal sector, thriving. People are holding onto their hard currency and dumping the ZiG. The latter is not convertible and the interbank market is tiny and cannot meet our needs for currency to import what we need.”

He said Zimbabwe needs $150 million a week to import essentials, but banks were struggling to find $20 million for imports.

Zimbabwe’s financial institutions cannot provide businesses with the much-needed working capital.

“Our immediate crisis is that if we do not move quickly, we will see widespread company closures, food shortages and empty shelves,” Mr Cross said.  “Our power crisis is severe with us only able to meet half of our estimated demand.”

The World Bank says high inflation, multiple exchange rates, unsustainable debt levels and ineffective control over government spending have increased the cost of production, reduced incentives for productivity-enhancing investment, and encouraged informality in Zimbabwe’s economy.+

Read: Debt talks falter as Zimbabwe loans grow 1.7pc 

Christopher Mugaga, the Zimbabwe National Chamber of Commerce CEO, said the depreciation of the local currency needed urgent government intervention.

“The government has a lot of work to do in making sure that the ZiG gains value because what we have seen in the market in the past few days definitely points to its depreciation, which is quite steeper than in the official market,” Mr Mugaga said.

“Secondly, the government has a big role to play in trying to make sure that the ZiG currency is protected by ensuring discipline even in acceptability of the currency, not only for the private sector, but also for the government because we still have services we can't pay for using the ZiG.” 

Vince Musewe, a Harare-based economist, said the currency problems had increased the cost of doing business in a country that was already struggling with electricity shortages and other factors.

“The costs of doing business are continually increasing from various sources such as inconsistent power supply, fuel costs, taxes, and importation costs,” Mr Musewe said. “You must then add the uncertainties around currency stability to that. Sadly, it's the consumer who has limited disposable income at the receiving end.”

Prosper Chitambara, a member of the Reserve Bank of Zimbabwe Monetary Policy Committee, said the instability of the local currency was part of the de-dollarisation process.

“The easiest and most effective yet difficult way to de-dollarise is to create supportive conditions, which importantly, our policymakers have rightly identified,” Mr Chitambara said. “These include balancing the budget, building forex reserves, reindustrialisation and reducing unemployment and informalisation.”

“While itself also a notable driver of instability in our country, the pace of infrastructure development is worth noting. Few countries can manage the infrastructure development we have achieved with limited access to international financial markets.”

Zimbabwe was forced to adopt a basket of currencies dominated by the US dollar in 2009 after inflation reached record-breaking levels.  

The country wants the ZiG to become the sole currency by 2030, but economists argue that it is near impossible for countries that dollarise to de-dollarise.

According to the International Monetary Fund (IMF), only four out of 85 countries surveyed during 1980 to 2001 succeeded in de-dollarisation. IMF cites Poland, Israel, Mexico and Pakistan.