Unveiling alternatives to durably stabilise the ZiG

Mushayavanhu’s inaugural Monetary Policy Statement (MPS) heralded the introduction of a new structured currency termed the “Zimbabwe Gold” (ZiG).

UNDER the leadership of a new governor, John Mushayavanhu, the Reserve Bank of Zimbabwe (RBZ) took a significant step on April 5, 2024.

Mushayavanhu’s inaugural Monetary Policy Statement (MPS) heralded the introduction of a new structured currency termed the “Zimbabwe Gold” (ZiG).

This new currency holds the promise of stabilising our economy and bringing about positive change. In my analysis of the 2024 MPS, I commended ZiG's concept of anchoring the currency with reserve assets and currencies like gold and USD, seeing it as a potential long-lasting solution to the recurring currency conundrum.

However, given the domestic context, one must ask: Will the ZiG withstand prevailing low public/market confidence? Is it not that reserve assets and currencies are secondary while building market confidence and trust is primary?

Against this background, the column seeks to proffer some recommendations that may go a long way in helping the RBZ to rebuild market confidence to durably stabilise the ZiG.

Political commitment

In theory, economics could be non-political. Yet, in practice, politics and economics have a direct relationship. In short, economics needs political support. All the previous national economic blueprints faltered mainly due to a lack of implementation of the proposed policy measures and reforms.

As such, politicians must fully support the swift implementation of 2024 monetary policy measures and other critical sector-wide reforms.

Policy consistency

The monetary authority has announced various policy measures to tame price and currency instability in 2024. The fiscal authority has reportedly promised to institute complementary fiscal policies soon to bolster the monetary policy front.

Authorities have been consistently inconsistent in policy implementation. They have frequently reneged on their prior policy pronouncements and commitments, damaging public trust and confidence in government actions.

Therefore, there is a great need for a whole-of-government approach to fully implement the proposed 2024 monetary policies while maintaining consistency in several interrelated ways: Internal, vertical, and horizontal consistency.

Citizen participation

In most cases, citizens are ambushed with policies that require immediate action. Before the policies were crafted, there was little to no engagement with critical stakeholders, including the citizens.

For instance, the RBZ set aside only 21 days to educate the public about the essential security features of the ZiG and how its official exchange rate is determined.

In all fairness, the provided window for education campaigns was too limited to adequately cover all corners of Zimbabwe, particularly in marginalised and underserved communities with poor road and network connections.

For a country like Zimbabwe, which has entrenched rent-seeking behaviours, this will disproportionately expose vulnerable societal groups to fraudsters and scammers.

It is my view that from now on, the RBZ, in particular, and the government, in general, must reckon that increased citizen participation is a crucial element of good governance as it allows citizens to inform, evaluate, monitor, and influence decisions that affect them daily.

Fiscal discipline

Zimbabwe has decided to back its currency with commodities and reserve currencies. The onus is now on the Treasury to live within its means primarily to allow the RBZ to be able to adjust its supply of ZiG to maintain confidence in future ZiG convertibility.

As such, there is a need for increased fiscal discipline if the ZiG is to succeed. The government must curb public resource leakages to corruption, review national projects and programmes to identify misplaced priorities, redirect expenditures to social sectors, and reform its long-term infrastructure financing models to reduce pressure on the fiscus.

Only through fiscal discipline will the RBZ be able to cut on its quasi-fiscal operations and achieve monetary discipline.

Create ZiG demand

If the ZiG is to succeed, there is a need to create demand for the local currency to help prop its value against foreign currency. In economics, we define a currency as a generally accepted form of payment issued by the government, including coins and notes in circulation within an economy.

It is a form of money that performs the critical functions of storing value, a medium of exchange, and a unit of account. For ZiG to be widely accepted in settling all transactions and debts - public and private - it must perform the above-mentioned functions. As such, just like the greenback, ZiG demand will only be sustained by its ability to purchase all goods and services in Zimbabwe. The government is the single largest consumer of goods and a provider of crucial public services.

This is a great advantage that must be utilised. So, to help the RBZ create ZiG demand amid a prevailing multicurrency regime, the collection of all government taxes and levies by the Zimbabwe Revenue Authority (Zimra) and payments for government services by economic agents must be settled in ZiG.

However, in this transition from ZWL, authorities must take a gradual approach to avoid the excessive creation of unbacked ZiG, which fuels depreciation and inflationary pressures in the economy.

Respect market forces

The Bank has announced that the ZiG exchange rate will be determined by market forces of demand and supply on the willing-buyer willing-seller interbank market, with it only intervening to clear the resultant disequilibrium.

But this is not new. The Bank has held this position since 2019. Yet, the local currency price discovery process is still experiencing solid structural bottlenecks.

I believe that a fully floating ZiG exchange rate is the permanent solution to neutralising speculative attacks and winning the war against the black market.

There is also a need for increased efforts to subdue exchange rate multiplicity, which sustains corruption, rent-seeking, and round-tripping shenanigans.

For instance, gold coins and gold-backed digital tokens trading platforms should be immediately disbanded as they risk creating an unnecessary gold demand, which compounds the accumulation of reserves.

These gold coins and gold-backed digital tokens will likely have their own exchange rates in the market. Following the 10-15% rule of thumb, the ZiG notes must also be made available and easily accessible to the transacting public. Otherwise, these notes and coins will have a different exchange rate than ZiG electronic balances.

RBZ independence

Economists define central bank independence as the degree of autonomy and freedom a central bank has in conducting its monetary policy and managing the financial system.

Central bank independence is rooted in the recognition that effective monetary policy-making should prioritise the best interests of the entire economy. Increasing RBZ's independence allows it to focus on long-term goals like price stability without being influenced by short-term political considerations. Monetary policies dictated by political considerations lack credibility, which sustains inflationary and adverse expectations.

Increase RBZ transparency

Since the ZiG concept is based on anchor reserve assets, there is a need for increased transparency at the RBZ, for instance, in terms of independently auditing asset reserves (mainly gold) in vaults and currency reserves (primarily USD).

Last time, the public was short-changed by authorities when the US$200 million Afreximbank Facility reportedly anchoring bond notes when introduced in 2016 was unaccounted for.

These bond notes are undergoing a demonetisation process through the 2024 MPS, but the public did not receive their USD cash at 1:1 rate.

Also, transparency is needed regarding the timeous release of vital monetary aggregates like government borrowing, banking sector credit creation, total/broad money supply (M3), and high-powered/reserve money (M0).

Financial data is critical as it helps economic agents to form their future expectations thus becomes very important to manage inflation expectations and the general price level in the economy.

To me, increased transparency will foster better communication between the RBZ and all its stakeholders, thereby reducing uncertainty, building trust, and contributing to practical policy-making.

Adoption of advanced financial technologies There is a chance for ZiG to succeed if the RBZ and banks adopt advanced technologies like distributed ledger technology that guarantee transparency and efficiency of transactions and are even difficult to disrupt.

This ensures that all market transactions are safely recorded, as no documents can be falsified since all data is immutable. This will circumvent the dangers of reliance on centralised, traditional database systems, which are highly prone to manipulation, may be hacked, and are susceptible to genuine human errors.

In addition, these advanced technologies are vital in ensuring precious mineral production tracking and monitoring to minimise chances of leakages through illicit trading.

Robust reform agenda

The economy is characterised by structural rigidities – characteristics within an economic system that constrain or delay economic growth and development – that hinder the efficient functioning of markets. It is the prevalence of structural rigidities that is causing excessive pricing distortions in the economy.

Hence, there is a need for the government to expedite the already ongoing debt resolution process with creditors under the Structured Dialogue Platform (SDP) to swiftly undertake robust reforms,

particularly economic, governance, land tenure systems, and bilateral investment promotion and protection agreements (BIPPAs) reforms.

Domestic resource mobilisation

Zimbabwe must make better use of and maximise existing natural resources rather than relying on borrowing. Unsustainable debt jeopardises government finances, fuels exchange rate volatility, and heightens interest, tax, and inflation rates, which harms saving and investment.

DRM will allow Zimbabwe to fund its own development goals, finance gender-responsive public services, and reduce economic, social, and gender inequalities.

As such, pursuing DRM will provide a long-term path to sustainable development finance:

Value addition and beneficiation, particularly in the mining and agriculture sectors;

Formalisation of the informal sector;

Tax reforms, for example, integrating ICT into the tax systems;

Strengthening of public financial management systems; and

Fiscal decentralisation reforms.

Sibanda is an economist. He is a research associate with Zimcodd. He is  a staunch advocate for inclusive and sustainable development. He writes in his personal capacity.

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