Zim Central Bank says new currency will definitively gain in value

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ZIMBABWE marked an epochal moment in its history when it introduced a new currency, Zimbabwe Gold (ZiG), on April 5, taking a giant step towards bringing a lasting solution to exchange rate volatility, which, for nearly half a decade, has driven inflation and made saving in the domestic unit difficult.

This is the third time Zimbabwe has switched currencies since scrapping the domestic unit in 2009, amid the ravages of inflation in a country that had gone through fundamental changes in its agricultural land ownership, was buckling under the weight of sanctions and was closed to sources of cheaper external funding.

In the realm of international trade, the dominance of major global currencies such as the US dollar, the euro and the yen has been undisputed for many years.

However, there is a growing recognition of the benefits associated with conducting trade using local currencies.

By bypassing the need for constant conversion into a foreign currency, trade in local units offers numerous advantages. They include enhanced economic stability, reduced dependence on foreign exchange and increased autonomy for any country.

As inflation continued to wreak havoc on Zimbabwe’s currency, the annual rate climbed to 55,3 percent from 46,7 percent in February 2024, reflecting the pass-through effects on prices, which track the movement in the exchange rate.

In light of the high inflation challenges emanating from exchange rate volatility, many observers have wondered how just the change in the national currency could turn the situation around.

But Zimbabwe’s monetary authorities expect the new currency and policy measures they are rolling out to restore confidence in the local unit and go a long way in fostering simplicity, credibility, certainty and predictability in the country’s monetary and financial system.

New Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mushayavanhu last week shared his perspectives on how ZiG and the monetary policy intervention he announced just over a week ago in the 2024 Monetary Policy Statement (MPS) will transform Zimbabwe’s financial affairs.

The country’s new currency will operate alongside several foreign units in the multi-currency regime, legislated to run until 2030, including the US dollar, the pound sterling, the euro, the South Africa rand and Botswana pula.

ZiG shall, the RBZ said, at all times be anchored and fully backed by a composite basket of reserves comprising foreign currency and precious metals (mainly gold) received by the apex bank as part of in-kind royalties and kept in its vaults.

Foreign currency balances will accumulate through market purchases from the 25 percent export surrender requirements, as well as the sale of some precious metals received as royalties.

What has changed?

Responding to questions during an interview with Zimpapers Television Network (ZTN)’s “Beyond the Dollar”, Dr Mushayavanhu said the basket of precious commodities, mainly gold, plus the foreign exchange holdings the bank has, would change the game.

“We are bringing in a new concept in the form of a new currency, which is backed by reserves. RTGS, bond notes were not backed by reserves. This is why they were behaving the way they were behaving.

“So, we decided we have to bring in a new currency, which has a new basis for exchange rate determination and I did explain in the Monetary Policy Statement that the exchange rate for the ZiG is going to be determined by the basket of commodities that is anchoring it.

“Over and above that, it is also going to be determined by the market.

“We had a situation, as I said earlier, RTGS, bond notes were not backed by anything, so we cannot link ZiG to the old currency; it’s a different currency altogether,” he said.

Dr Mushayavanhu said while the bond notes were at some point backed by a US$200 million facility from Afreximbank, the amount of local currency in circulation was exceeded, exposing the local currency to forces of depreciation.

As part of RBZ’s commitment to transparency under his stewardship, Dr Mushayavanhu said the bank opened its vault for all to see that the institution indeed had the gold to back the domestic currency.

“For the first time in the history of the bank, we opened the vault of the central bank for all to see what it is that we have and we did that in the presence of His Excellency, the President of Zimbabwe, and on that day we said we have 2,5 tonnes of gold, which are worth US$185 million as of that day (April 5, 2024) and we have US$100 million Nostro balances, making a total of US$285 million, backing ZiG worth US$80 million.

“Further to that, in the Monetary Policy Statement and Statutory Instrument 60 of 2024, that brought about ZiG, we have mentioned that at least once a year, we are going to be audited and the auditors must confirm how much gold we have, how much other precious metals we have and how much by way of Nostro balances we have to back ZiG, and that is going to be an ongoing process,” he said.

Dr Mushayavanhu pointed out that before even taking the trouble of bringing external auditors, as a show of transparency, the manner the central bank would conduct its business would go a long way in rebuilding the market’s confidence.

“Our behaviour, the way we manage things should convince the Zimbabwean public that the reserves are there. When there is more money in circulation, you feel it, (because there will not be too much money in circulation), and you are not going to see that happening.

“In fact, my fear is that the opposite will happen; we might end up having deflation and we may have to do something, otherwise . . . ,” Dr Mushayavanhu said.

On several occasions since taking over the reins at the RBZ, the Governor pledged his commitment to ensuring the bank strategically manages money supply growth through a disciplined culture, in sync with improved economic activity and increased reserves in the form of precious minerals (mainly gold) and foreign currency balances.

Under a market-determined exchange rate system, the bank will periodically intervene in the market, using foreign exchange reserves from the export surrender component, to maintain a balance between domestic and foreign currency liquidity so that the exchange rate stays stable and at the desired level appropriate to support sustainable economic activities.

The bank will also have other monetary policy instruments such as interest rates and open market operations at its disposal to keep the exchange rate in the desired direction.

“In our case, we have said any further increase in the amount of money in circulation can only happen if we have the reserves,” Dr Mushayavanhu said.

The central bank chief warned economic agents against disposing of their local currency holdings, saying the new unit would likely be in short supply soon, essentially as a result of measures in the MPS.

Dr Mushayavanhu said while it was his wish for all economic players to be disciplined, he had little power to force them to do so. However, he issued a warning against errant conduct, saying “the fundamentals of ZiG will force them” to behave in a disciplined manner.

“What do I mean by that? If anyone wants to bet against ZiG and sell it to the central bank, we will buy; we can buy all of it. We have enough reserves to buy it, all the ZiG in the market, but you will be aware that there are certain measures that we announced in the Monetary Policy Statement.

“We have agreed with the Treasury that come the June QPDs (quarterly payment dates), companies are going to be required to pay 50 percent of their QPD obligations in ZiG. So, they are going to have to look for ZiG and here is the math.

“The ZiG currently in circulation is equivalent to just under US$80 million.

“The Treasury, on a quarterly basis, collects plus or minus US$300 million equivalent. Fifty percent of that is US$150 million; there is not enough ZiG in the whole country to meet that 50 percent.

“So, ZiG is going to be valuable, whether you like it or not,” Dr Mashuyavanhu said in a tacit warning against careless disposal of a currency economic agents will need in bulk soon after.

The bank last week said it had both operational and instrument independence through its board of directors and Monetary Policy Committee (MPC).

Further, the bank’s board provides the necessary oversight while the MPC is empowered to formulate and prescribe policies independently.

The bank is also protected against interference by provisions of the RBZ Act.

Source: Sunday Mail