Earlier this month, we got a surprise announcement that Zimbabwe would be introducing a structured currency. We speculated on what that could be and were way off. The Minister of Finance later clarified and we have been stewing on it and gauging the market response.
Finance Minister Mthuli Ncube said the structured bit just means that the ZW$ will be linked to a hard asset like gold. Kind of like how the gold tokens are linked to gold, but different.
See, with the gold tokens, there is (supposed to be) physical gold stored in a vault somewhere and tokens released into the market all have physical gold backing them up. Meaning there is a kilogram of physical gold in a vault for every token worth a kilogram of gold.
So, essentially, you are holding gold when you hold the token. That is if you can trust that there indeed is gold to back up the token.
It’s a bit different with the structured ZW$. There will not be physical gold to correspond with each ZW$ in the market.
Rather, the amount of ZW$ that can be released into the market is limited by the growth of the hard asset that the ZW$ is linked (anchored) to.
So, if the ZW$ is anchored to gold, the growth in money supply will be limited by the increase in the price of gold on the world markets.
So, the structured currency is a mix of a fiat currency, in that it’s value still derives from trust in the govt’s regulations and the RBZ’s monetary policies, and a commodity-backed currency in that if you squint, it looks like it’s value is linked to gold’s.
It’s not commodity-backed but is trying to mimic being so.
Mthuli said work is still ongoing on how to actually structure the whole thing.
The issue of trust
As the outgoing RBZ governor noted years ago that all efforts to fix the currency mess the country has been in for ages have been undone by the absolute zero level of trust Zimbabweans have in their govt and its central bank.
So, it is a positive step that the govt will not be able to arbitrarily increase the money supply, which has been leading to inflation and the devaluation of the ZW$. However, we still have to trust that what we’re told is actually what’s on the ground.
We all had to ask the same questions when it came to the gold-backed tokens. We have to trust that the audits we see are legit and that the gold exists.
With the structured ZW$, a currency board will be created to monitor it, hurray for more govt jobs. We will have to trust that the figures they report are accurate. What is the actual money supply? – is not something we can definitively answer even though the RBZ releases that data.
Or maybe the numbers are trustworthy but we’re skeptical for no reason. Still, that highlights the problem of trust even more clearly. Without that trust, it doesn’t matter that money supply growth is limited, we will still shun the structured ZW$.
The market is wary
The ZSE Technician, which analyses the performance of the Zimbabwe Stock Exchange and the Victoria Falls Exchange noted the following, in the week following the clarification on what the structured currency is about:
This week was bearish; there were losers than gainers in both exchanges resulting in significant losses. If we combine both exchanges, they lost approximately 10,2%. The poor performance can be attributed to many factors including liquidity crisis, uncertainty over structured currency (and) decline in trading volumes.
The market doesn’t know what to think of the coming structured currency. How will the general public respond to it? How will it affect the exchange rate in the short term? What will it mean for USD use?…
Maybe some of this uncertainty will be eased when the govt releases more details on how the structured ZW$ will look.
I wonder what you think of the structured currency. Do you think it will lead to a better outcome than the mess that we have right now?
What’s your take?