By Blessing V. Bonga
ZIMBABWE’s Central Bank announced in early April the country’s adoption of a new gold-backed, structured currency in the name of the Zimbabwe Gold (ZiG). The news was met with mixed feelings across the political and socio-economic divide, while the obvious pertinent question remains whether or not ZiG would turn the country’s dire economic situation around, something all its predecessors failed to achieve.
Ordinary citizens seem lost as to what it means for a currency to be referred to as “structured,” let alone gold backed. In addition to the many uncertainties regarding the future of ZiG and its success or failure, the physical notes are yet to be released onto the market and transactions remain paperless, at least for the time being.
Reserve Bank of Zimbabwe (RBZ) Governor, John Mushayavanhu announced that the ZiG notes and coins shall be issued in the following denominations: 1ZiG, 2ZiG, 5ZiG, 10ZiG, 20Zig, 50ZiG, 100ZiG, and 200ZiG. These will be distributed through the normal banking channels, while the coins shall be introduced in due course.
What is a structured currency?
A structured currency (SC) is basically a currency that is attached to a specific exchange rate or currency basket, while it is backed by a collection of foreign exchange assets such as gold. In his inaugural Monetary Policy Statement at the helm of the Central Bank, Governor John Mushayavanhu explained in his statement that, “The Reserve Bank is introducing a structured currency which is generally defined as a currency that is pegged to a specific exchange rate or currency basket and backed by a bundle of foreign exchange assets (potentially including gold). This means that a Central Bank can only issue domestic notes and coins when fully backed by a foreign “reserve” currency or foreign exchange assets and that the currency is fully convertible into the reserve currency on demand.”
All things being equal, a structured currency should guarantee a number of positive outcomes for the economy. Such include, but are not limited to, offering intrinsic value and stability, paving way for control over money supply and instilling confidence and attracting investment. SC should reduce the risk of hyperinflation while ensuring greater stability to traditional fiat currencies. Commodity-backed stability in turn should enhance confidence in the currency. Concerning control over money supply, the SC should limit government’s ability to manipulate money supply, while in the long-term price stability should be witnessed. Investors and businesses are also most likely to trust and use a currency backed by tangible assets.
Previous attempts at new currencies
Going down memory lane, Zimbabwe has in the past two decades gone through tumultuous economic times, changing currencies left, right and centre, trying to revive an ailing economy in the ICU. This was despite the fact that at some point just after independence the Zimbabwe dollar (ZWD) had started off at par with the dollar, before being overwhelmed by a cycle of hyperinflation, economic turmoil, and multiple currency transitions. However, in 2008, the country went through one of the most severe hyperinflation chapters in recent history as commodity prices doubled on a daily basis, leading to absurd basic commodity prices of millions of Zimbabwe dollars. On the back of such economic turmoil, in 2009 Government then legalised the use of a basket of foreign currencies, effectively deserting the Zimbabwe dollar in favour of an array of currencies, that included the United States dollar and the South African rand.
Prior to the introduction of the multi-currency regime, the local currency experienced three phases of re-denominations in the years 2006, 2008, and 2009 respectively, while the first instance was code-named Operation Sunrise. The operation was launched in August 2006 with the intention to curb Zimbabwe’s hyperinflation by reducing inflation through chopping off three zeros from the currency. This meant that a million Zimbabwe dollars became a thousand Zimbabwe dollars, while a thousand Zimbabwe dollars became one Zimbabwe dollar. Operation Sunrise forced individuals to surrender their old notes to the Central bank within three weeks. The operation was poorly communicated, and this meant that majority of citizens were in the dark about the latest developments, a situation that is repeating itself with the newly introduced ZiG.
Renowned Economics Professor, Gift Mugano maintains that ZiG is likely to flop as opposed to what monetary authorities believe. The reality, according to Prof Mugano is that ZiG is as good as its predecessor, the ZWL (RTGS), maintaining that the economic environment has remained the same, hence nothing new should be expected. To cite a few of Mugano’s concerns, he added that the exchange rate remained volatile as evidenced by the continued runaway of the black-market rate that is rumoured to be trading at close to ZiG20 to 1USD, while Government maintains that the official bank rate is pegged at ZiG 13,56 to 1USD.
“Our disposable incomes and aggregate demand have not increased because the zeros were cut; while there is a dwindling foreign currency supply caused by the double tragedy of declining export receipts (as a result of falling commodity prices) and draining of foreign currency as a result of food imports caused by drought. It is my humble view that RBZ’s decision to lower interest rates is a serious policy misfiring that comes with massive consequences,” he said.
Mugano added that there is unproductive lending on the market hence any rational financial institution would institute measures aimed at defending its asset base from shrinking.
“Investment in housing development and properties stands out as the most attractive investment option. In circumstances like these, there are high chances that fewer resources will be channeled towards the productive sector. This will militate against the survival of the ZiG. Strong currencies are backed up by production – resulting in fewer imports and an increase in exports,” added Mugano.
The Economic expert also cited speculative borrowing as a spanner in the way of ZiG, as banks will likely still lend the productive, although it will be reasonably lower than in previous years. In such circumstances, any individual who accesses this cheap money will undoubtedly run to the parallel market and buy forex and service the loan by taking advantage of the increase in exchange rate, thereby making massive profits in the process.
As such, stakeholders have called on government to take the first step in terms of confidence building in the new currency by taking ZiG payments thereby promoting market confidence in the currency. Such a move, they argue would instil public confidence in the currency, as speculation would be mitigated.
Rosemary Mpofu, the Consumer Council of Zimbabwe (CCZ) boss was quoted in a local daily as having said, “The council is of the view that all government departments, including the passport offices, fuel stations, the Vehicle Inspection Department and Zimra, among others should take the lead and demand payment for their services in the local currency, ZiGs.
“This does not only help to boost confidence in the local currency, but it will send a clear signal to the region and globally that the ZiG is a real and acceptable currency and thus speed up its acceptance in the international markets.”
With a lot going on in terms of getting the general public to accept the new currency, only time will tell with regards to whether it is all doom and gloom or there is actually light at the end of the tunnel for the new currency. But as the saying goes, experience is the best teacher, therefore monetary authorities have a mammoth task ahead to ensure ZiG does not become another flop.