‘New currency doomed without right policy mix’

THE structured currency the Government intends to introduce to curtail persistent exchange rate volatility will not yield the desired result in the absence of appropriate policy measures to address key fundamentals, economic analysts said ahead of the release of the eagerly awaited framework for the new medium of exchange.

Zimbabwe’s currency has plunged about 97 percent on the open market since the beginning of the year while the official rate has lost just over 152 percent of its value at the start of the year.

The domestic exchange unit is now changing hands above $23 000/US$1 on the black market and $16 600 to the greenback on the interbank market.

The depreciation, analysts said, reflected a lack of confidence in the domestic currency, amid speculation the major driver of the currency slide was unrestrained Zimbabwe dollar liquidity flow into the market.

With prices in the Southern African country linked to the domestic unit’s US dollar exchange rate, the annual inflation rate shot to 47,60 percent in February from 34,80 percent in January.

Reserve Bank Governor Dr John Mangudya said recently the 2024 monetary policy statement (MPS) would carry the finer details of what exactly the structured currency will look like, how it will operate, and what instrument or asset will be used to anchor or back it.

Usually, the MPS is out by the last week of February each year.

However, speculation is rife that gold, the country’s single largest export and one of the world’s safest stores of value, is the front-runner to take the mantle of the anchor asset, which would be a monetary system akin to the gold standard first used by the United Kingdom from about 1821.

The central bank chief revealed the MPS had been delayed to allow authorities to put together the outstanding details about the structured currency; which inadvertently has left the market on the edge.

“The MPS shall be released as soon as this process (framework for structured currency) is completed.

The bank is working on the structure to ensure that the structured currency is indeed backed for durable stability of prices in Zimbabwe,” Mangudya told this publication last week.

A structured currency is a mix of a fiat currency, a medium of exchange regulated by the Government and the central bank through its monetary policy, and a commodity-backed currency, which derives its value from a physical asset such as gold.

Zimbabwean authorities mooted the idea of a structured currency to find a lasting solution to the perennial challenges of exchange rate volatility and rapid inflation increase in the country.

By his admission, Mangudya is on record saying the fear of “inevitable” domestic currency depreciation from the inflation traumas of the past was partly responsible for creating a self-feeding cycle of inflation drivers in Zimbabwe.

The coterie of measures the Government has rolled out to stabilise the local currency since its reintroduction in 2019, after a decade-long hiatus, have only had very limited success.

Zimbabwe has suffered two episodes of economic hyperinflation, in the decade to 2008 and post reintroduction of its domestic unit in 2019, both of which manifested in currency instability and high inflation.

Several measures to stabilise the currency have only had limited success.

At the height of inflation in 2008, Zimbabwe’s annual inflation rate peaked at 500 billion percent, according to the International Monetary Fund.

The rate has averaged 42,63 percent from 2009 to 2024, reaching an all-time high of 785,55 percent in May of 2020 and a record low of minus 7,50 percent in December of 2009.

Several misaligned fundamentals have been cited for the sustained depreciation of the local currency, including suspected printing (short-term funding) to fund long-term capital projects.

At a time when Zimbabwe’s borrowing is limited, the Southern African country has used a combination of its scant foreign currency revenue and billions of local currency to pay contractors, who instantly convert the money on the open market to preserve value.

From minus 2,21 percent in, Zimbabwe’s budget widened to minus 4,08 percent in 2023 although significantly lower than short regular falls during the previous administration.

While the country’s central bank launched the auction system to facilitate orderly currency trading, volumes have slumped as authorities sought to encourage activity on the remodelled interbank market.

Even then, the foreign currency Treasury used to sell to banks for onward sale to their clients has dwindled, leaving importers scrambling for the available crumbs and with no option but to turn to the parallel market.

Zimbabwe has also suffered from decades of economic meltdown, which has decimated its manufacturing and agricultural bases, forcing the country to rely on imports even for trinkets, heaping further pressure on the exchange rate.

Economist and Small and Medium Enterprises Association of Zimbabwe chief executive officer, Farai Mutambanengwe, chipped in saying the fundamental issue was, apparently, unceasing money supply growth.

He said the evidence of excess liquidity due to printing “was the exchange rate itself”, which continues to weaken rapidly.

“If you look at the official exchange rate, over the last couple or three months, it moved from $8 000 to about $15 000. It has almost doubled. The rate would not move that much if there is no printing.

“That unceasing money supply growth is a result of the Government spending well beyond its means,” he said. “If that fundamental problem is not fixed, we may change nothing.

“The problem with trying to back the currency, for example, is that you need to have the gold. Currently, I do not think we have the gold in stock to be able to back the currency.

“That gold has to come from somewhere for it to back the currency. It’s easier for us just to say we have just stopped printing money, that carries no cost,” he said, adding that the over-expenditure by the Treasury had previously been met through printing and could likely be the drive on the exchange rate run.

Economist, Brains Muchemwa, noted that while the idea of backing the currency with a valuable commodity such as gold was welcome, its success would be limited to the extent “policymakers create functional demand for the local currency”.

“A structured currency in whatever form will not be able to stabilise our domestic currency unless and until the policy makers create functional demand for the local currency.

“The gold coins and digital tokens only rewarded those taking speculative positions,” Mr Muchemwa said, adding this was the reason challenges with exchange rate volatility and inflation have persisted.

“Government will need to take the bold step to create demand for the ZW$ by obligating that all taxes be payable in local currency, without which the local currency will be an orphan without a guarantor,” he said.

Another economist, Cornelius Dube, said any currency properly supported with the right policy framework to anchor its stability has a good chance to succeed regardless of what anchors it.

The local unit continues to weaken despite Zimbabwe’s stellar show on the external sector front where the total value of its shipments grew by nearly 10 percent to US$7,2 billion in 2023 from US$6,59 billion realised over the same period in 2022.

Statistics from the Zimbabwe National Statistics Agency indicate that from 2020 to 2023, Zimbabwe exported goods worth US$24,2 billion against imports of US$31 billion, resulting in a trade deficit of US$6,8 billion.

If Zimbabwe indeed turns to gold to back its currency, it would retrace the history of money to the 19th century when the UK used the gold standard.

The gold standard is a monetary system in which the standard unit of currency is a fixed quantity of gold or is kept at the value of a fixed quantity of gold.

The currency is freely convertible at home or abroad into a fixed amount of gold per unit of currency.

The system came to an end in the 70’s, after intermittent use over the years occasioned by different factors such as war, limited availability of gold and economic depressions, when limited gold reserves forced the United States to revert to paper currency.

The advantages of the gold standard are that (1) it limits the power of governments or banks to cause price inflation by excessive issue of paper currency, although there is evidence that even before World War I monetary authorities did not contract the supply of money when the country incurred a gold outflow, and (2) it creates certainty in international trade by providing a fixed pattern of exchange rates.-ebusinessweekly