PERSISTENCE GWANYANYA
The announcement of gold-backed digital tokens by RBZ has generated huge debate about the efficacy of the measure to stabilise the Zimbabwe dollar.
The increasing demand for US$ as a store of value and for transaction purposes calls for a viable alternative to the greenback.
The dominance of the US$ to the extent of 70% has had serious ramifications on ZW$ stability and as such needed be checked.
The increased demand for US$ come on the backdrop of low confidence levels in the ZW$, which traces to the journey we travelled and losses we incurred in the way—from Black Friday of 14 November 1997 to hyperinflation of 2008 to dollarisation (2009-2013) and currency reforms.
There is a strong argument that the effects of a currency crisis are very difficult to cure due to the physiology of money, which revolves around confidence and trust.
That is why they say money is trust and confidence and trust and confidence is money.
Unsurprisingly, all financial crisis tended to be elongated and intensive.
A reflection on Global Financial Crisis (GFC) is instructive. Recovery from the GFC has tended out to be very slow and elongated (“slowbalisation”).
The case of Germany where the effects of hyperinflation of the 1940s are still reflected in high demand for cash makes another good example.
As such, in the current circumstances, there is need for more effective measures to restore confidence in the ZW$, boost its demand and counter the dominance of the US$ to avoid costly redollarisation.
l can’t think of any product other than gold that can viably compete with the US$ especially as store of value.
This could be the reason why RBZ’s MPC has opted for gold instruments starting with physical gold coins and then the digital backed tokens to stabilise the ZW$.
The high demand for physical gold coins attests to confidence and trust in gold, which, over time, has proved to be a far better value preservation product that fiat (paper) currencies.
Out of the 31,866 gold coins sold as at 10 March 2023, only negligible amount was redeemed on vesting and banks are overwhelmed with the demand for the product as the market seek to store value.
That is why a handful of gold coins (ZW$26bn) had a pronounced effect on stability.
This is what motivated the digital gold coins, which are highly divisible to cater for the different needs of the market.
Just like with mobile money, it’s possible to transact any amount through the e-gold wallets or e-gold cards which removes the headache of change.
This divisibility attribute gives digital gold token a competitive edge over cash US$ and make them more accessible to the market.
Even smallest amounts of ZW$ can find home in digital gold tokens, which in the second phase we will be able to transact with.
The digital gold tokens are not only ideal for the retail end of the market as wholesale customers can derive value from this product.
The wholesale segment of the market comprises of high value corporates and individuals who hold significant ZW$ such as government contractors.
The velocity of money is high at this constituency of the market and every time they receive the ZW$ they tend to offload into US$ and drive ZW$ depreciation.
This is our main problem as country, not growth in money supply.
Despite significant payments of invoices in US$ there is high temptation by some contractors to offload the few ZW$ into US$ to preserve value
This only strengthens the case for digital gold token. Now, like any currency, the key issue is about confidence.
Our confidence in the digital gold tokens derives from the fact that they will be backed by gold which is being accumulated from royalties in physical form. For a couple of months, the Central Bank has been accumulating royalties of special minerals in minerals themselves.
Clearly, given the low confidence levels in the economy RBZ is expected to put in place adequate measures to assure the market about the adequacy of the gold to back the digital tokens all the time.
Because both gold coins and gold backed tokens are going to be limited to the gold reserves, we seen the products as restraining ZW$ supply, which supports the current tight monetary policy stance.
There are some market concerns that these gold backed products are instruments of arbitrage as the gold coins and token are traded at interbank rate (currently around US$1:ZW$1000) plus a margin of 20% which is lower than the parallel market rate (currently US$1:US$1900).
l take the view that this arbitrage is currently the biggest attraction of the gold backed products and is seen as supporting the demand for the ZW$. We expect the gap to narrow faster as everyone seek to take advantage of the current arbitrage.
Importantly, as the digital gold backed tokens boosts the demand for the ZW$, it reduces its volatility with the concomitant effect of stabilising it.
As l wrap up l need to clear the misconception by ZIMCODD that RBZ has been making losses on gold coins.
It’s important to understand that the source of forex used by RBZ to buy gold is the interbank market (mainly export surrender funds) and not the parallel market and as such the question of loss when that gold is also sold at interbank rate doesn’t arise.
As we conclude, it’s interesting to observe that the quantum of money that has been giving us headache is a small amount of less than ZW$150bn (US$150m @ US$1:ZW$1000) being excess reserves (including what RBZ has been mopping through Non Negotiable Certificates of Deposits).
Excess reserves are the most liquid and volatile component of money supply being the money banks keep on their RTGs platform and what RBZ has mopped from the banks through Non Negotiable Certificates of Deposits but depositors have access to when they want to transact.
Persistence Gwanyanya is an economist and a member of the central bank’s Monetary Policy Committee. He writes on his personal capacity.
