- Zimbabwe dollar dropped by -2%
- This was from depreciating by 4% last week
- Sentiment was buoyed by the desire to introduce a gold-backed digital currency by RBZ
Harare- Embattled Zimbabwe dollar dropped -2% against the greenback on the latest Auction Market held on 25th April 2023, from ZWL1000.0227 to 2WL1021.2072, the least depreciation since the year commenced. The Zimbabwe dollar was depreciating in a region of 1% to 5%. Lat week, the ZWL depreciated by 4%.
The sentiment was buoyed by the Central Bank’s idea to introduce a gold-backed digital currency to enhance stability. Zimbabwe dollar has depreciated by 9%, month-to-date losses while year-to-date losses have widened by over 30%.
The main strength of a gold-backed digital currency is that it provides stability and security. Gold has been used as a form of currency for centuries, and its value has generally remained steady over time. As such, the value of gold-backed currency will not fall below the value of gold, making it a relatively stable investment option.
However, the underlying question is whether the gold-backed digital currency will be able to correct behavioural economics, policy slippages and excessive printing of money as well as human rights abuses, fundamentals key in unlocking currency functionality.
The first problem is that Zimbabwe's gold reserves are not officially audited, thus, making it unclear whether RBZ actually has enough gold to substantively back the currency.
Zimbabwe’s economic mess is an interplay of both political and economic forces. From the political side, gross human rights violations, especially against opposition voices and lack of reforms in the ZEC structures is scaring away potential investments from the West which President Mnangagwa is trying to rest relations with.
In a circular released by the House of Commons of the United Kingdom last week, Zimbabwe is still suffering from gross human rights violations including political persecution of opposition parties and lack of constitutionalism within the ZEC’s body. In that regard, the parliament has requested to avert President Mnangagwa’s invitation to the coronation of Prince Charles.
“We therefore urge the government to withdraw President Mnangagwa’s invitation until Job Sikhala MP and other political prisoners are granted their constitutional right to bail and concrete actions are taken to address human rights abuses and guarantee free and fair elections,” read the petition.
The effect on such petitions is that they increase the risk index of the country, dampening foreign direct investments. Europeans, especially the West have one voice as far as human rights are concerned.
Besides that, another problem affecting Zimbabwe’s currency is policy slippages. The central bank is not consistency in policing. The recent cut of repo rates to 140% in a period where the Bank is cognisant that the government borrows more to sustain its election campaigns is the testament. Instead of tightening money supply ahead of elections, the central bank rather softened it.
Further, economic fundamentals are out of order. Zimbabwe’s economic environment still runs short of proper investments. Employment is very low, at just 2 million where the informal sector, where vending is rife. The econ0mic environment remains tough for exporters to operate courtesy of toxic corporate tax regimes, lack of property rights, state capture of key industries and 25% surrender thresholds on exporters in a country where US Dollar liquidity for companies is scarce.
Given that, the market has lost goodwill and confidence in the system, meaning, the elephant in the room for the Zimbabwe dollar sustainability is confidence deficit in the system.
Therefore, without addressing the issues of good will and trust, property rights and taxation policies, human rights abuse and sound economic fundamentals, there is a risk that the new currency could eventually go the way of its predecessors.
Without addressing confidence crisis, human rights abuses and behavioural economic, the gold-backed digital currency will not be a silver bullet as the government expects.
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