Gono’s Zim Dollar Push: A Journey Into the Past

“KNOCK Knock!”
“Who’s there?”
“Zim Dollar.”
“%$#*”


This draws all kinds of hilarious and unprintable responses from Zimbabweans in the face of a proposed bounce back of the Zimbabwe dollar.

But if Reserve Bank of Zimbabwe chief Gideon Gono has his way in his attempt to bring back the Zimbabwe dollar, the response to the joke could be inflation.

A couple of months later, the response could be three zeroes.

A year later, Zimbabwe could be back to hyperinflation.

But in the meantime observers say, young Zimbabwean pupils could begin counting beyond one million because up to a thousand will be no good should the Zimbabwe unit bounce back.  

After getting comfortable with counting up to a hundred following the introduction of the greenback and the South African rand this year, the little ones could have slackened up in the numbers game.

This is because economists believe Gono’s plan could be another economic misadventure that could stoke inflation –– under control after Zimbabwe adopted multicurrency system.

Since the adoption of the US dollar, prices of goods have stabilised. Gono says the Zim dollar will now be backed by gold reserves.

Gono defends bringing back the Zimbabwe dollar on the grounds the exercise is not going to be a “blind” one.

Rather, Gono believes a “guarded” reintroduction of the currency could work.

But analysts see an ulterior motive in bringing back the unit. They believe Gono could be oiling the printing press once again to finance and subsidise government departments and a coterie of government officials as he did in the past.

Gono believes that the new currency will have “real and tangible” worth.

He said: “Such a new currency will have a real, tangible worth as embalmed in the real assets(s) backing it.

This gives the new currency the characteristic of general acceptability as a fluent medium of exchange in goods and services markets.”

“Given the country’s proven resources of gold, platinum and diamonds, among several other minerals, a fully backed currency which can freely convert back to the real underlying assets at the instance of the currency holders wishes will be having the desirable character of being a legitimate store of value. In other words, the currency will have a stable value of time given the direct link to the volume of tangible assets from the real sector.”

But economists say Gono’s plan to bring back the unit without boosting output in all sectors of the economy will end in ignominy for the discredited central bank chief yet again after failing to institute economic reforms and slowing inflation.

They say Gono will only do more harm to the economy with his latest experiment.

Harare economist John Robertson said: “If we try to bring the Zim dollar back, it will lose value in a week. You need credibility in your currency which is not there.”

Another economist Daniel Ndlela says: “People lost confidence in the financial system and if you talk of the Zimbabwean dollar what comes to people’s minds is whether they are going to sleep in queues again.”

Ndlela expressed reservations on the plan to support the currency on the amount of resources available.
He said this was not a wise one given the country’s depleted mineral reserves.

“Technically, if you say that the currency is going to be based on gold what if the gold is only 15-18% of the currency in circulation? Does he propose that the Zimbabwe dollar he wants to bring back is going to be used side by side with multicurrency or a dominant currency?”

Economists feel that the country’s gold is not enough to back the Zimbabwe dollar as the dominant currency.

Ndlela says there is no basis to be used on an isolated resource.

“The currency is based on the total assets value of a nation. Even countries with the richest resources have never based their currencies on specific resources,” he said.

Robertson believes that Zimbabwe investment laws will not play in Gono’s favour in his plan because empowerment legislation in the southern African country “scared away” investors.

In his mid-term monetary policy statement, Gono urged government to revise the country’s empowerment laws saying Zimbabwe needed to allow foreigners to own 51% shareholding.

RBZ claims Zimbabwe has 13 million tonnes of gold in reserves. At Zimbabwe’s current extraction rate of 20 tonnes, it will take 650 000 years for the reserves to be exhausted.

With platinum reserves of 2,8 billion tonnes, it will take 1 200 years to exhaust the reserves at an annual extraction rate of 2,3 tonnes per year.

Robertson added: “the resource will stay underground for billions and billions of years because the empowerment legislation and proposed amendments scare away investors.”

But observers say if the proposed Reserve Bank Amendment Bill sails through, Gono could be kept in check by Finance Minister Tendai Biti.

Biti and international financiers blame Gono’s quasi-fiscal activities for accelerating the decade-long economic decline.

Under the new arrangement, a Currency Board, or monetary authorities will issue domestic currency, backed by foreign exchange reserves.

Gono alludes to analysts’ concerns that huge investment will be needed for the mining sector is to produce adequate mineral reserves to back economic activity.

In order to achieve his new goal, Gono proposes fiscal consolidation, trade and capital account liberalisation, liberalisation of the foreign exchange market, strengthening of institutional credibility and rebuilding of high foreign exchange reserves.

But Biti says he will quit should Gono be given the green light to bring back the Zim dollar.

He said:” As long as I am Minister of Finance the Zimbabwean dollar is not coming back,”

More worryingly, is President Robert Mugabe’s economic beliefs. He fired Herbert Murerwa years back for sticking to what the aged leader described as “textbook economics” while the people suffered. Mugabe started calls for the Zimbabwe dollar to bounce back, and could be urging Gono to print money in a bid to curry favour with poor Zimbabweans ahead of elections.

The gold standard is not currently used by any government, having been replaced completely by fiat currency.

The use of paper money, convertible into gold, to replace gold coins, originated in China in the 9th century AD.

Gold standards replaced the use of gold coins as currency in the 17th-19th centuries in Europe.

In the 1790s, Britain suffered a massive shortage of silver coinage and ceased to mint larger silver coins.

It issued “token” silver coins and over struck foreign coins. With the end of the Napoleonic Wars, Britain began a massive recoinage programme that created standard gold sovereigns and circulating crowns, half-crowns, and eventually copper farthings in 1821.

According to the know-it-all Wikipedia, in 1833, Bank of England notes were made legal tender, and redemption by other banks was discouraged.

But the following year, the Bank Charter Act established that the Bank of England’s notes, fully backed by gold, were the legal standard.

According to the strict interpretation of the gold standard, this 1844 Act marks the establishment of a full gold standard for British money.

The currencies or banknotes that were backed by the gold standard were the old German reichsmarks, Yugoslav dinars, Turkish liras, Brazilian cruzeiros, Croatian dinars, Polish złoty, Argentine peso leys, Angola Kwanzas reajastodos, Zairean zaires and Bolivian bolivianos.

By introducing the gold standards as a Zimbabwe’s monetary system, the central bank is taking a journey into the past.

But Gono could be happy, that former US Federal Reserve chief Allan Greenspan expressed sympathy with a hard currency basis, and argued against fiat money. Greenspan famously argued the case for returning to a gold standard in his 1966 paper “Gold and Economic Freedom”, in which he described supporters of fiat currencies as “welfare statists” intent on using monetary policies to finance deficit spending.

He argued that the fiat money system of today has retained the favourable properties of the gold standard because central bankers have pursued monetary policy as if a gold standard were still in place.

Chris Muronzi

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