Sunday, February 12, 2017

A Case for a Gold-backed Currency in Zimbabwe
Persistence Gwanyanya
Zimbabwe Sunday Mail

AS we try to find a lasting solution to the country’s currency crisis, the introduction of a gold-backed currency appears to be one of the best options available to Zimbabwe today.

The prescribed currency option resonates well with the growing tide of global advocacy for the return of the gold standard.

Increasing dissatisfaction with fiat money, which is being witnessed after the global financial crisis, has generated renewed interest in gold-backed currencies.

Any solution to the current challenges should necessarily guarantee monetary stability.

Importantly for Zimbabwe, a gold-backed currency would be a potent source of confidence to the economy, which is necessary for attracting both domestic and foreign investment.

However, before interest in the gold-backed currency is taken seriously, it is important to understand the practicality of adopting this currency in the current environment where all countries in the world are using fiat money.

Fiat money is a legal tender established through Government decree. It drives its value from Government regulation and is not linked to any physical asset or commodity.

Unlike commodity money, fiat money is not redeemable. In contrast, the value of a gold-backed currency is attached to a fixed quantity of gold.

For example, if the Reserve Bank of Zimbabwe (RBZ) sets the price of gold at ZW$40 000 per kg (35 274 ounces), the value of the dollar would be 1/10 000 (0,0001) of a kilogramme of gold or just 0,1 grammes of gold.

Using this hypothetical Zimbabwe dollar value, the US$6 billion money supply in Zimbabwe would be backed by 150 tonnes of gold, which is equivalent to 5 years of the country’s full annual production of 30 tonnes of gold.

This target seems achievable as Zimbabwe has an estimated 13 million tonnes of underground gold reserves, which probably translates to trillions of dollars.

Clearly, there would be need to increase the exploration and mining of the yellow metal for Government to raise the required reserves from royalties.

The current average royalties rate of 2,25 percent for primary producers (3 percent) and artisanal producers (1,5 percent) calculates to average annual royalties of 675kg of gold, which is a far cry from the 150 tonnes that would be needed to back the currency at par to the US dollar.

Given this constraint, there may be need to start by backing the bond notes (US$88 million) and coins (US$15 million), which requires US$103 million worth of gold royalties.

This is quite reasonable as we are already in a multiple currency system, and the major concern for a number of experts is whether bond notes would sustain their value in future given a number of factors currently weighing them down.

The economy has remained unbalanced, typified by high levels of imports which cannot be supported by dwindling exports.

Externalisation, which has remained unabated, is equally sucking liquidity from the economy.

Government may have to buy the gold from the private producers and leverage on the credibility of RBZ so far to establish a gold bank for building more gold reserves. The gold bank should be managed by independent and credible elements.

This would go a long way in addressing the confidence deficit in the economy, which is a major drawback to economic rebuilding.

It is arguable that to address the country’s economic imbalances, there is need for significant capital to boost production and exports, which would also cause a reduction in imports.

The infrastructure deficit of US$14 billion-20 billion, including the US$5 billion needed to industrialise the country, is instructive.

Ironically, despite the rich resource endowments in Zimbabwe, capital has remained a major constrain due to the confidence crisis currently rocking the economy.

Clearly, there is need for measures to boost confidence in the economy, and backing bond notes with gold could be one such measure.

Its major advantage would be to contain inflation, through limited supply, and maintain a stable exchange rate — all if which are the broken promises of fiat money.

By linking the bond notes to a fixed amount of gold, it would be possible to maintain the 1:1 exchange rate with the US dollar, as the bond notes could be redeemable to gold in the event of loss of confidence in them.

It is quite possible that given the foreign payment backlogs, people could possibly sell their bond notes for gold, which they would use to buy the US dollars or any other currency in the basket of multiple currencies, further worsening the crisis.

To minimise this, RBZ is advised to negotiate for some significant Nostro funding facilities with favourable terms, which can entice importers to pay an extra amount to access.

It is only sensible to anticipate that importers would welcome this because they are currently incurring costs as high as 15 percent to buy cash against the Real Time Gross Settlement (RTGS) balances stuck in the account, and in some cases five percent for purchase of higher currency denominations (US$50s and US$100s) to smuggle outside the country so as to fund imports.

The difficulties in making foreign payments have been a major discouraging factor for investors in Zimbabwe as business is difficult to operate in such an environment given the country’s import dependence.

Also, rational investors may not invest in a country where it is difficult to remit proceeds from an investment.

It is possible for the gold bank to attract more investors if the right policies are put in place as the abundance of gold in the country is a major attraction.

Needless to emphasise that this will largely depend on guarantees of property rights.

Quite often, it is remarked that the Stone Age did not end because of shortage of stone. It ended because stone got out of fashion.

This may well happen to gold.

Countries like China, Russia and the US are building massive reserves of gold. China is now the leading gold producer and currently has the world’s fifth largest gold reserves.

It has become the largest importer of gold at 750 tonnes or 27 percent of global output in 2011.  US has more than 8 000 tonnes of gold reserves, which is quite a significant amount of trillions of dollars.

Quite clearly, the future of gold is unknown as economically powerful countries can dictate its direction. It only makes sense for the country to leverage on this and other precious resources now, hence the argument for a gold-backed currency.

There is certainly need to take this debate seriously as many countries are doing so. There is a strong case for Zimbabwe to lead the efforts to find an optimal currency solution given the cash challenges that confront us.

Needless to mention that like the case with all policy initiatives, success of gold-backed bond notes will depend on commitment to implement sound economic policies.

 Persistence Gwanyanya is an economist, banker, financial advisor of Zimbabwe Business and Arts Hub (ZBAH) and member of the Zimbabwe Economics society who writes in his personal. You can e-mail your feedback to, Whatsapp +263 773 030 691 or bog on

No comments: