The doctrine of Monetarism underscores the importance of the money supply in circulation in the economy as the primary driver of economic growth. It advocates for stable prices through prudent monetary policy. Monetarists believe that inflation is always and everywhere a monetary phenomenon. Therefore, central banks worldwide, including the Reserve Bank of Zimbabwe (RBZ), have the crucial role of maintaining low inflation, stabilizing the local currency, and fostering resilient domestic financial markets. This role is instrumental in ensuring economic stability and growth.
Here in Zimbabwe, the Reserve Bank of Zimbabwe (RBZ) Act assigns the central bank (RBZ) the sole responsibility for formulating and implementing monetary policy. This pivotal role of the RBZ Governor, who is mandated to submit the monetary policy in June and December of each year, outlining policies for the next six (6) months, is crucial for our understanding of the economic landscape. The 2024 Monetary Policy Statement (MPS), which is expected to be released on the 5th of April 2024, is a highly anticipated event eagerly awaited by economists, investors, and individuals interested in the Zimbabwean economy.
In this week’s column, I aim to provide a concise overview of the general market expectations from the upcoming MPS, with a particular focus on the launch of a new “structured currency.” With its unique design and features, authorities believe this new currency is set to bring significant changes to the Zimbabwean economy, making it a topic of great interest and curiosity.
Brief Currency History
Before I delve into the new “structured currency,” it's essential to understand the historical context. After attaining independence in 1980, Zimbabwe transitioned from the then-Rhodesian pound to the first Zimbabwean dollar (ZWD) at par with the US dollar (USD). The independence series comprised $2, $5, $10, and $20 notes, followed by $50 and $100 in 1994. A close look at time series data indicates the ZWD started to follow a downward path in the early 1990s due to a plethora of reasons, including the impact of the International Monetary Fund (IMF) sponsored economic structural adjustment program (ESAP) which fuelled deregulation, deindustrialization, poverty, and unemployment. These, coupled with impromptu payments of lucrative gratuities to thousands of war veterans, led to a significant currency crush famously known as Black Friday on the 14th of November 1997. This history is a testament to the resilience and challenges of Zimbabwe's economy, and it's essential to keep it in mind as we discuss the future of its currency.
Excessive government spending in the 1998 DRC war, which reportedly spent US$3 million per day, coupled with falling export earnings and the chaotic land reform program of the early 2000s, could not spare the ZWD. As the ZWD continued downward, the RBZ under Operation Sunrise conducted the redenomination of the first Zimbabwe dollar (ZWD) in 2006 at a rate of 1,000 first dollars for each second dollar (ZWN). Concurrently, the local currency was devalued against the USD from 101,000 first dollars (101 once revalued) to 250 second dollars. Notwithstanding the redenomination, currency depreciation and hyperinflation persisted, leading to another 92% devaluation in September 2007 to ZWN/USD 30,000. In July 2008, RBZ undertook a second redenomination of the local unit to give a third currency coded, ZWR. For instance, ZWN10 billion was reduced to ZWR1. Again, in early 2009, RBZ undertook a third redenomination by removing 12 zeros off the currency to give a fourth dollar, coded ZWL. As hyperinflationary pressure kept momentum, the ZWL finally succumbed to dollarization under a multicurrency regime in 2009.
After a decade of multicurrency regime, the government austerity measures and currency reforms, which started in 2019, saw the re-branding of the ZWL, introduced through Statutory Instrument 33 (SI33) of 2019. The local unit was codenamed ‘Real Transfer Gross Settlement’ (RTGS) dollar comprising all bond notes and coins in circulation, mobile money, and bank balances. However, the continued massive decline of the ZWL forced the promulgation of SI142 by the Treasury on 24 June 2019, thus officially introducing the Zimbabwe dollar as the sole legal tender for all domestic public and private transactions and settlements.
Current Context
As alluded to earlier, the currency reforms that started in October 2018 led to the separation of nostro-foreign accounts (FCA) and the local RTGS dollar. The first official interbank market trade in early February 2019 set the rate at RTGS/USD 2.50 before losing a staggering 62% of its value in only four (4) months to close June 2019 at ZWL/USD 6.60 (ZWL/USD 8.50 in alternative markets). By the end of December 2019, the ZWL officially traded at ZWL/USD 16.77, down 61% from June 2019. In the successive years 2020, 2021, 2022, and 2023, the ZWL lost 80%, 25%, 84%, and 89% of its value against the USD in the formal market, respectively.
Official and Alternative Exchange Rates (ZWD/USD)
Source: RBZ, Direct Market Observation
Fast forward to 2024, the local unit (ZWL) has erased a staggering 72% and 70% of its value in the official and alternative (parallel) markets, respectively, in only three (3) months. For the same period in 2023, the ZWL erased 24% and 44% in the official and parallel markets, respectively. As explained in last week’s column, this massive ZWL decline is likely attributable to low foreign currency generation as global mineral commodity prices remain subdued and rising fiscal pressures emanating from the assumption of RBZ liabilities by the Treasury as well as payment of public infrastructure projects and agricultural subsidies in the summer cropping season.
The preceding perspective is corroborated by RBZ statistics showing that in 2023 alone, the ZWL component of total money supply/broad money (M3) (isolating the USD component of M3 subdues the impact of exchange rate movements) grew at an alarming pace, averaging 16.4% per month. In annual terms, ZWL broad money component grew by a staggering 446% from ZWL1.01 trillion in December 2022 to ZWL5.5 trillion in December 2023. In addition, the monetary policy environment's unpredictability, rampant corruption, and multiple exchange rates are sustaining excessive rent-seeking behaviors like speculation and arbitrage.
Year-on-Year (YoY) and Month-on-Month (MoM) Inflation Outturn (%)
Source: Zimbabwe National Statistics Agency (ZimStat)
The massive ZWL decline experienced in the first quarter of 2024 (1Q24), coupled with route-to-market reforms and tax increases like Value-added tax (VAT) implemented through the 2024 national budget, has fueled general prices of essential goods and services in USD and ZWL terms. The blended official inflation figures from ZimStat show mounting inflation pressure, forcing annual inflation outturn, which closed December 2023 at 26.5%, to spike to 55.3% in March 2024. Consumers have witnessed a 55.3% jump in shelf prices in March 2024 compared to their March 2023 level. On an MoM basis, blended inflation (weighted average of ZWL and USD price indices) spiked by 4.9% in March 2024, slightly down from the February 2024 outturn, to give an unsustainable 1Q24 average of 5.4%.
Structured Currency
To tame rampant depreciation of the ZWL and chronic inflation prevailing in the markets, authorities have elected to launch a “structured currency.” According to the sketchy details provided by the Treasury and RBZ, the structured currency (SC) will be the existing ZWL but is now linked to hard currencies like the USD and hard assets like gold. As such, a SC likely incorporates the characteristics of fiat money, which relies on government regulations and RBZ monetary policies, and commodity-backed money, whose value is derived from the value of an underlying asset.
From the preceding, one can speculate that the pending SC will be just a large-scale adoption and use of gold-backed digital tokens dubbed Zimbabwe Gold (ZiG), which were introduced in the system by RBZ in May 2023. Tokenization operates on the premise that technology enables the conversion of real-life tangible assets, such as gold, into digital tokens representing them. The physical gold held by RBZ fully backs the tokens. These digital gold tokens can be used for investment purposes and are also tradable and capable of facilitating business transactions and settlements.
Zimbabwe has been building gold reserves since it changed payment modalities of royalties, where 50% is now settled in the physical form of the minerals. Apart from the accumulation of gold reserves, the ZiG will also be backed by foreign currency (USD) reserves accumulated through voluntary export surrender requirements. Exporting companies will continue to cede some of their export proceeds in exchange for ZiG tokens, which they can later liquidate into ZWL to make local payments. The Treasury can also demand that corporate taxes and import duties be settled using ZiG to create value.
Chances of Success
While we await more details about the “structured currency,” it is worth noting that backing a currency with gold could bring stability. Generally, gold is considered a safe haven investment during downturns and financial crises because of its long history of use as a store of value. Its properties are helping it achieve this status: malleability, portability, aesthetic appeal, virtual indestructibility, universal acceptance, liquidity, and rarity. So, hypothetically, the ZiG could slow ongoing rapid economic dollarization and strengthen the ZWL by limiting the ability of authorities to print willy-nilly.
There is also a chance for gold tokenization (ZiG) to succeed if the RBZ and banks adopt advanced technologies such as distributed ledger technology, which guarantees transparency and efficiency of transactions and is even difficult to disrupt. This ensures that all market transactions are safely recorded, as no documents can be falsified since all data is immutable – anyone cannot modify it. This will circumvent the dangers of reliance on centralized, traditional database systems, which are highly prone to manipulation, may be hacked, and are susceptible to genuine human errors.
In addition, advanced technologies are vital in ensuring gold production tracking & monitoring to minimize chances of gold leakages and illicit trading. Traceability measures help curb criminality as information such as the exact source of gold, holder of gold buying license, and amount of taxes paid on gold exports can be collected and analyzed. The current rampant illicit gold trading, as reported by Al Jazeera’s Gold Mafia documentary, if not curtailed, will militate against the accumulation of gold reserves, which are crucial in supporting the value of the “structured currency.”
The ZiG concept requires frequent auditing of physical gold reserves backing the digital tokens by reputable and independent audit institutions. Suppose there are no trusted audits of the quantum of gold reserves in RBZ vaults versus issued digital tokens (ZiG). In that case, the tokens risk suffering the same fate as bond coins and notes, which RBZ introduced under a US$200 million facility provided by Afreximbank. There is also a need to provide strong guard rails against gold leakages from the RBZ vaults, which can be caused by theft and fraud.
Last but not least, there is a need to set up public trust and investor confidence-building measures. These include, among others, massively reducing leakages of public resources by curbing public corruption and IFFs, maintaining policy consistency, adopting a participatory approach to economic governance (multistakeholder consultations), improving public service delivery, and adequate political will to swiftly implement a robust reform (economic, governance, land tenure systems, etc) agenda. This robust reform agenda is critical to improving efficiency in government, strengthening institutional & regulatory frameworks, improving social fairness & inclusion, and eliminating prevailing excessive pricing distortions inhibiting market competition and innovation.
Parting Shot
The RBZ is expected to present the 2024 MPS on Friday (5 April 2024) at a time when the local currency is facing massive depreciation pressures and the economy is under threat of unsustainable price growth across all markets. This calls for bold monetary policy measures to tame recurring instability, which continues to render local businesses uncompetitive, impoverish citizens, and widen societal inequalities. Will the “structured currency” to be launched through the 2024 MPS, among other monetary measures, bring a lasting solution to Zimbabwe’s currency conundrum? The column will provide a granular analysis of this policy in due course. Please watch out!!!
