Zimbabwe is not trending in the right direction. You could argue that the whole world is struggling too but Zimbabwe was already on this track before the pandemic and the Russia-Ukraine war.
We are now working with an inflation rate of 191% year on year. That means prices have almost tripled from this time last year. To be clear, this is not an exchange rate issue, prices have been going up in USD terms as well. The obvious example being cooking oil where 2l cost around $3.50 last year but costs around $7.00 as we speak.
The government and the RBZ are working together to fix the economy. Let us look at the new measures meant to achieve that.
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Commitment to multicurrency regime
This was long overdue. For the longest time Zimbabwe’s growth has been upended by uncertainty. The Zimbabwean govt has been famous for changing policies on a whim for years now.
It was not that long ago when the govt tried to outlaw the use of the USD in the country. Unrelated to the use of multiple currencies we had the bank lending suspension a couple of months ago.
All these sudden pronouncements made it difficult for anyone to plan for the future and businesses were justified in scaling back on investment and reinvestment.
Now, the govt has chained itself to the multicurrency regime. The law will now provide for the multicurrency regime until 2025. This is a step up from the uncertainty that came every time the govt stressed that we were on course to de-dollarise.
The govt really has been the chief author of uncertainty in the economy. So, although this is a positive step, we also know that the law can be changed and could that be the case after elections next year? One couldn’t say.
Gold as a store of value
I’m glad that the govt is no longer in denial. They are now acutely aware that the ZW$ is failing because Zimbabweans just don’t trust it, and the govt supporting it by extension.
The minister of finance acknowledges that the ZW$ collapse comes from lack of confidence, adverse inflation expectations and arbitrage opportunity seeking.
The hyperinflation of the noughties is still fresh in our minds and it will take time before we can view the ZW$ as a store of value. We have turned to the USD for that.
That is shooting us in the foot though because the average person is competing for limited USD with businesses that need to import to keep providing certain goods and services. So, every dollar banked under a mattress is a dollar that could have been used to fund essential imports.
With this in mind, the govt is providing another store of value that the average citizen should use instead – gold coins. If you are not worried about foreign payments, you don’t really need the USD. You only hoard it to somewhat store value, it’s better than the ZW$ at that but it is losing value itself.
The USD has lost around 83% of its value since 1974. Now the US is experiencing its highest inflation in 40 years and the USD’s rate of decline is accelerating.
Gold on the other hand has been appreciating in the same time frame, up 2692.5% since 1974. 1kg of gold cost around US$2,500 but costs around US$58,500 today. So, if it is a store of value you seek, gold is far superior to fiat currencies like the ZW$ and even the mighty USD.
So, I don’t know if you can tell but this excites me.
How stable will these gold coins be?
The gold coins will be minted by the RBZ owned Fidelity Gold Refineries and all will be able to buy them through normal banking channels.
That means the govt has control over the supply of the coins. That right there makes some uncomfortable. It is reasonable to assume that the RBZ will mint way too many of these coins, rendering them useless.
That might not be the case if we can trust that they will be gold coins indeed. See, unlike fiat currencies whose value comes from trust in the govt issuing them, gold has its own value independent of the Zimbabwean govt.
So, if it’s gold, it doesn’t matter how many coins the govt mints, we won’t be holding a large enough number to impact international gold prices. That’s great and only gets better.
The govt really can’t mint as many coins as they want because they do not have a limitless supply of gold. So, even if they wanted to, they couldn’t. A far cry from 0s and 1s in a computer called ZW$ that have no upper limit.
I will reiterate again, my excitement is restrained until we can confirm that the coins will be gold coins and not gold coloured coins.
The gold coins as a currency
If the coins can be had in small denominations I think we will be able to use them as a currency too. I hope that’s the case because to be honest, most of us are not looking to store value in the long term, but rather in the short term. We don’t earn enough to worry about the long term.
We just want to make sure that money set aside for bread, meats and vegetables will still be enough to do that later in the month. You can’t set aside ZW$ for that, hence why we demand the USD.
If the gold coins allow for small purchases we will use them as a currency. If the smallest denomination coin is worth US$100, the gold coins won’t make as much of a dent in USD demand. I have to be able to exchange a coin for a loaf of bread without needing change. If change is needed it will be in USD, meaning USD demand won’t be affected.
Zimbabwe back on the gold standard
The world over, central banks moved away from gold-backed currencies. All preferring the fiat currencies that they can print to their hearts’ content. While Zimbabwe is not moving back to a gold-backed ZW$, the gold coins are actually better than that scenario.
With gold coins we don’t have to worry about whether or not there really is gold in a vault somewhere. We will be holding the gold in our hands.
So, with the commitment to a multicurrency regime and gold coins, there is something to love in the latest measures taken by the govt to fix the economy.
It’s not all roses though and we shall look at the not so good measures in another article.