- China wants the yuan, its currency, to take over from the dollar as the world's reserve currency
- Long-term US dollar supremacy may be weakened if more trade is settled in yuan
- Russia, which was subject to U.S. and EU sanctions, made an unexpected action by fixing the price at 5,000 rubles for a gram of gold
China claims it will begin purchasing oil and gas in yuan as 2023 drags on, a move that may eventually put the dollar's position as the world's reserve currency in jeopardy. According to the Saudi Press Agency/Associated Press, Chinese President Xi Jinping stated that China will continue to buy significant amounts of oil and gas from Gulf states in the immediate term. Xi Jinping, the president of China, is promoting the settlement of energy trades in yuan in a move to consolidate the Chinese economy.
In this piece, we'll examine how Zimbabwean policymakers might take advantage of this chance to strengthen the use of the yuan in the basket of the country's most widely used currencies. The adoption of the RMB/yuan during this period weakens the dollar and could boost the Zimbabwean economy.
Global Economic Implications
Long-term US dollar supremacy may be weakened if more trade is settled in yuan. A statement from the Chinese foreign ministry claims that the Chinese government has already decided to perform its settlement in the Chinese yuan, or RMB. The US economy is now the largest in the world by default since the US dollar currently accounts for the majority of global trade.
The second-slowest rate of economic growth in China's history was recorded in 2022, a sign of the negative impact the nation's stringent coronavirus laws have had on the country's commercial sector. According to official data, the world's second-largest economy's gross domestic product (GDP) increased by 3% in 2022. Although far lower than the government's 5.5% target, this is better than most economists had anticipated. Beijing quickly changed its rigorous zero-Covid stance end of 2022, though.
The policy had a significant influence on the economy of the nation last year, but the unexpected easing of the regulations has caused a sharp increase in Covid cases, which threatens to also hinder growth in the early months of 2023. 2022's economic growth was the weakest since 1976, when Chairman Mao Zedong, the founder of the People's Republic of China, passed away, except for the beginning of the pandemic in 2020 when full-year GDP increased by 2.2%.
Experts have however expressed caution regarding China's economic data, with some stating that it is more appropriate to look at the trajectory of the data than the actual numbers to determine how the economy of the nation is doing.
What it means for Zimbabwe
Nigel Chanakira, president of the Zimbabwean Economic Society, is quoted in the most recent issue of the weekly Financial Gazette as saying that the multicurrency should continue to exist until 2030 to allow independent power producers to pay back equity participants, lenders, and investors. The US dollar is the most used currency in the multicurrency system, followed by the RTGS and then the Rand (particularly in the Southern regions of the country), as many economic agents are still hesitant to use the local RTGS due to its tendency to fall sharply in value every week.
Case of USD
Zimbabweans are forced to purchase newer notes at a premium on the streets as a result of the market rejecting worn-out currency due to the use of US dollars in the economy. The importation of US dollars presents a dilemma for policymakers as well because of the ruptured relationship with the US government, which has resulted in the imposition of sanctions on the economy. The multicurrency was first used in 2009 during the GNU, and the new dispensation embraced it in 2018 since the local dollar had been avoided because of its inflation-driven loss in value.
Zimbabwe is unable to print new US dollar notes since the US government owns the currency entirely. Zimbabwe's inflation and exchange rate concerns have made the use and selection of currency a hot topic. On the market, though, both domestic (ZWL) and international currencies are accepted by the government. The bad side effect of utilizing the USD as a medium of exchange is the inability to obtain change, which forces many retailers to use barter trade, in which you trade a smaller-value good for a change.
Case of the Rand Monetary Board
A monetary union made up of South Africa, Namibia, Lesotho, and Swaziland are called the Common Monetary Area. All four of these currencies are valued and exchanged on par with the South African Rand, even though each of these sovereign states issues its currency. They are all under the control of the South African Reserve Bank. Zimbabwe must join this board to use the rand, and the RBZ must cede all decision-making authority to the South African Reserve Bank. Despite the seeming advantages this would bring, it is highly unlikely that this will ever happen.
The adoption of the Rand has some effects on Zimbabwe, some of which present significant technical difficulties. By adopting the Rand, Zimbabwe would essentially become a member of the Common Monetary Area (CMA), which includes South Africa, Lesotho, Swaziland, and Namibia. The CMA is a binding contract with strict but reasonable requirements. Given Zimbabwe's current economic state, it is impossible to see Zimbabwe achieving two of these responsibilities.
Article 2 of the agreement outlines the first duty, which requires member nations (except Swaziland) to back up local currency issues with foreign reserves and forbids the monetisation of fiscal deficits. The Swaziland Central Bank has kept more than enough foreign reserves to back up the whole amount of local currency it has issued, despite not being required to do so by law. It has added credibility and confidence in the agreement, which is a crucial component to its success, that all parties to the CMA have kept to it faithfully.
Given its current foreign reserve issue, it is exceedingly doubtful that Zimbabwe, if it were to join the CMA, could uphold this clause. Thus, allowing Zimbabwe into the CMA would be a very dangerous decision that could jeopardize the legitimacy of the agreement. Any sensible policymaker would want to steer clear of risks like these, particularly in the current economic climate. This brings up the second reason why Rand's adoption is extremely unlikely. Zimbabwe might theoretically choose to forego issuing any local currency altogether to get around this requirement. The next section makes the case for why this alternative is very improbable, impractical, and politically unappealing.
Either option would indicate that Zimbabwe would cede control over its currency and exchange rate policies while severely limiting its ability to exercise budgetary policy. From that point forward, Zimbabwe would only have a very limited amount of fiscal room to work with to alleviate its dire situation. A country employing an overvalued currency (compared to its circumstances) would immediately have the impact of reducing the competitiveness of its exports, which would cripple any export-led growth attempt.
Furthermore, any economy in Zimbabwe's condition that wants to start an economic recovery program would be best advised to at the very least have its monetary and fiscal policies available to it. This is since a successful combination of the two approaches requires careful coordination. It is improbable that an imported monetary policy that is unaware of the specific economic circumstances of the nation will be of much assistance.
All things considered, Zimbabwe adopting the Rand would probably be a bad deal for South Africa and her CMA partners in that it would be bad for Zimbabwe and politically undesirable.
Case of Commodities-backed currency
Following Russia's invasion of Ukraine, the USD to ruble exchange rate fell precipitously, hitting a low of 135 rubles in March 2022. However, the Ruble has stabilized since that historic fall because it is now supported by commodities like gold, proving that supporting a currency with gold can work.
The Russian ruble fully recovered from the decline brought on by the sanctions imposed on its economy by the US government on April 22. Russia, which was subject to U.S. and EU sanctions, made an unexpected action by fixing the price at 5,000 rubles for a gram of gold. Oil, natural gas, and other key exports would need to be paid for in rubles, the country's finance ministry declared. The Russians made a brilliant economic decision by requiring customers to visit the Russian central bank and pay gold to obtain rubles to conduct business.
The ruble had been trading between 70 and 80 rubles to the dollar. Following the fines, it had fallen to 120. Now that it is trading at about 70 rubles to the dollar, the ruble has recovered. And it's due to the way the ruble and gold were tied.
Source: EQUITY AXIS RESEARCH
Russia's brilliant manoeuvre may jar American businesses that have foreign clients or suppliers. Foreign business partners may require their American counterparts to pay in rubles or bullion because they need to swap gold for rubles to pay for inputs like energy, minerals, or fertilizers. Additionally, American businesses might need to buy a lot of rubles to cover the cost of their inputs for factories, warehouses, or raw materials located abroad.
Many economies had abandoned the gold standard as being outdated. To prevent the Zimbabwean dollar from collapsing and to reduce demand for US dollars, the central bank of Zimbabwe also released gold coins in July. In November, smaller versions went into circulation. The poor local currency is typically shunned by Zimbabweans in favour of U.S. dollars, which they believe are more widely accepted abroad and have a longer value retention rate. Mangudya expressed his desire for Zimbabweans to choose the gold coins, which are currently available and cost roughly $1,800 each. Unfortunately, the gold coins have not been able to stop the local currency's value decline or to create stability.
Source: EQUITY AXIS RESEARCH
From the graph above, it is clear that the introduction of gold coins in July had little effect on the stabilization of the currency, as the value of the currency continued to decline monthly to the end of the year. The currency declined by 59% of the official auction market platform from the time the gold coins were introduced until the end of the year, proving that they were nothing more than marketing hype.
Case of the yuan
The use of the RMB/yuan could be one action that the central bank still tries to implement. Former president of Zimbabwe, R.GMugabe gave enormous emphasis to Zimbabwe's connections with China, especially after the 2003 standoff with the European Union that led to capital flight and an economic downturn when looking at the history of Zimbabwean and Chinese relations. China has been said to as Zimbabwe's "sole significant foreign supporter" due to their principle of non-interference in internal affairs, such as human rights issues; relations have increased in line with Zimbabwe's political isolation from the European Union.
Zimbabwe's "Look East" policy, which aimed to deepen bilateral and commercial ties and give preference to investors from countries other than China—including Malaysia, Singapore, Vietnam, Japan, South Korea, India, and Russia—has become increasingly China-centric. Trade between the two nations was at a record $1.1 billion (£0.8 billion) in 2016, with China being the largest importer of cotton and different minerals as well as the largest buyer of Zimbabwean tobacco. Zimbabwe received in return imports of finished goods like apparel, electronics, and others. Chinese government-owned construction companies have also been working hard to create infrastructure, notably Zimbabwe's $100 million (£75 million) National Defense College. Additionally, China agreed to finance a new Harare parliament with 650 seats last year, which was completed in 2022.
Zimbabwe adopted the Chinese yuan, commonly known as the renminbi (RMB), as one of its official currencies in March 2014 when its central bank added the RMB, the Japanese yen, the Australian dollar, and the Indian rupee to the already-existing basket of currencies. Zimbabwe gave up on its currency in 2009 after it became completely worthless due to extreme inflation. Since that time, it has been employing a currency basket where the US dollar dominates.
According to a recent report from the International Comparison Program, a global statistical initiative affiliated with the World Bank, China may overtake the US as the largest economy this year. The report predicted that many more nations will use the RMB to protect themselves from currency losses when transacting with China.
The RMB is used as a reserve and settlement currency by some African nations, including the Bank of Ghana. As the RMB acquires increasing traction in international trade, the Nigerian central bank has already started to convert more of its foreign reserves from dollars to yuan. Dollars make up over 85% of Nigeria's reserves. Additionally, to invest in China's bond market, the South African Reserve Bank inked a contract with the People's Bank of China. One of the nations where the rising demand for Chinese yuan has been noted is Mauritius.
It would be advantageous for the local economy if the Zimbabwean economy stormed at this advantageous time with the yuan. Although the precise amount of reserves required to completely convert the Zimbabwean economy from the dollar to the yuan is uncertain, a basic guideline for stability states that the reserves should be sufficient to fund all necessary imports and commerce for the ensuing six months.
Conclusion: How the Yuan Could Become a Global Currency
China wants the yuan, its currency, to take over from the dollar as the world's reserve currency. It would have more control over its economy as a result. Despite serving as a reserve currency at the moment, some crucial conditions must be met before the yuan may replace the dollar in Zimbabwe. These conditions include:
The RBZ must have foreign exchange reserves of at least $700 billion in yuan in total. The People's Bank of China (PBOC) must also loosen its peg to the US dollar and permit the free exchange of the yuan. The PBOC must be clear about its goals for the yuan going forward, and China's financial markets must become open. These are the prerequisites for the yuan to displace the US dollar as the primary medium of exchange in the economy. While this will be difficult, it may eventually result in economic stability for Zimbabwe.
As a result of the strong economic ties between the two nations(Zimbabwe and China), policymakers in Zimbabwe could start adopting the yuan as an alternative to the US currency. All the issues caused by the use of the dollar will be resolved by this action. The central bank must maintain its short-term reliance on the USD, add the yuan as a significant currency to the currency basket, and submit an application to join the Rand Monetary Union to achieve the best possible economic recovery.