Opinion / Columnist
ZiG needs to be backed by RBZ discipline
16 Apr 2024 at 18:04hrs | Views
According to the Reserve Bank of Zimbabwe (RBZ), a structured currency is a currency that is pegged to a specific exchange rate or currency basket and backed by a bundle of foreign exchange assets like gold.
This new "structured currency" termed Zimbabwe Gold (ZiG) has immediately replaced the Zimbabwe dollar (ZWL) as legal tender for settling all transactions and debts, private and public.
The ZiG will form part of the multicurrency basket and circulate with other currencies like USD. All ZWL banknotes, ZWL bank balances, ZWL mobile money accounts, and ZWL prices will be converted into ZiG using an exchange rate determined by the global price of gold as of April 4 2024 and the ZWL interbank rate as of 5 April 2024.
Official statistics indicate that the ZiG is backed by RBZ reserve asset holdings constituting US$100 million in cash and 2.5 tonnes of gold (worth US$185 million).
The combined US$285 million worth of reserve assets is adequate to provide full cover of reserve money in the system, totalling $2.6 trillion or US$90 million equivalence.
Zimbabwe has been gradually building gold reserves since it changed payment modalities of royalties, where 50% is now settled in the physical form of the minerals.
Apart from the accumulation of gold reserves, the ZiG is backed by foreign currency (USD) reserves accumulated through involuntary export surrender requirements.
Exporting companies will continue to cede 25% of their export proceeds in exchange for ZiG. To support the value of the structured currency, the Treasury will also demand that corporate taxes be settled using ZiG 2 07.
It means that from now on, ZiG's money supply growth will only be limited to the growth of RBZ's reserve asset holdings, ceteris paribus.
So, hypothetically, this arrangement could restrict the ability of authorities to print ZiG willy-nilly.
If this holds, the gold-backed ZiG will become a stable currency, thus clamping ongoing rapid dollarisation of the economy.
Generally, gold is considered a safe haven investment during downturns and financial crises because of its long history of use as a store of value.
Its properties are helping it achieve this status: malleability, portability, aesthetic appeal, virtual indestructibility, universal acceptance, liquidity, and rarity.
Also, the officially shared specimen ZiG notes have a quick-response (QR) code that an imaging device can read.
This likely indicates that authorities will soon adopt advanced technologies like blockchain and distributed ledger technologies.
These technologies guarantee transparency and efficiency of transactions and are even difficult to disrupt.
This ensures that all transactions are safely recorded, as no documents can be falsified since all data is immutable – anyone cannot modify it.
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.
Nevertheless, for the ZiG to succeed, authorities also need to adopt advanced technologies in gold production tracking & monitoring to minimise the chances of gold leakages and illicit trading. Traceability measures help curb criminality as information such as the exact source of gold, holder of gold buying license, and amount of taxes paid on gold exports can be collected and analysed.
The current rampant illicit gold trading, as reported by Al Jazeera's Gold Mafia documentary, if not curtailed, will militate against the accumulation of gold reserves, which are crucial in supporting the value of the "structured currency."
With an adverse economic outlook, for instance, subdued global mineral commodity prices threatening the value of export receipts coupled with the El-Nino-induced drought that has affected the 2023/24 summer cropping season, there will be enormous spending pressure on the Treasury to cushion the vulnerable groups and the economy in general.
Just like it is the norm globally, the Treasury will need help from the RBZ (money printing) to meet the demand of the pending humanitarian and economic crisis.
The increase in ZiG money supply will only be permissible if there are enough gold reserves; hence, there is a need for a whole of-government approach to curb illicit gold trading.
Otherwise, the expected increase in import bill will render the ZiG worthless.
Again, the ZiG concept will require frequent auditing of physical gold and US dollar cash reserves backing the currency by reputable and independent audit institutions.
Suppose there are no trusted audits of the quantum of gold reserves in RBZ vaults versus issued structured currency, ZiG.
This new "structured currency" termed Zimbabwe Gold (ZiG) has immediately replaced the Zimbabwe dollar (ZWL) as legal tender for settling all transactions and debts, private and public.
The ZiG will form part of the multicurrency basket and circulate with other currencies like USD. All ZWL banknotes, ZWL bank balances, ZWL mobile money accounts, and ZWL prices will be converted into ZiG using an exchange rate determined by the global price of gold as of April 4 2024 and the ZWL interbank rate as of 5 April 2024.
Official statistics indicate that the ZiG is backed by RBZ reserve asset holdings constituting US$100 million in cash and 2.5 tonnes of gold (worth US$185 million).
The combined US$285 million worth of reserve assets is adequate to provide full cover of reserve money in the system, totalling $2.6 trillion or US$90 million equivalence.
Zimbabwe has been gradually building gold reserves since it changed payment modalities of royalties, where 50% is now settled in the physical form of the minerals.
Apart from the accumulation of gold reserves, the ZiG is backed by foreign currency (USD) reserves accumulated through involuntary export surrender requirements.
Exporting companies will continue to cede 25% of their export proceeds in exchange for ZiG. To support the value of the structured currency, the Treasury will also demand that corporate taxes be settled using ZiG 2 07.
It means that from now on, ZiG's money supply growth will only be limited to the growth of RBZ's reserve asset holdings, ceteris paribus.
So, hypothetically, this arrangement could restrict the ability of authorities to print ZiG willy-nilly.
If this holds, the gold-backed ZiG will become a stable currency, thus clamping ongoing rapid dollarisation of the economy.
Generally, gold is considered a safe haven investment during downturns and financial crises because of its long history of use as a store of value.
Its properties are helping it achieve this status: malleability, portability, aesthetic appeal, virtual indestructibility, universal acceptance, liquidity, and rarity.
This likely indicates that authorities will soon adopt advanced technologies like blockchain and distributed ledger technologies.
These technologies guarantee transparency and efficiency of transactions and are even difficult to disrupt.
This ensures that all transactions are safely recorded, as no documents can be falsified since all data is immutable – anyone cannot modify it.
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.
Nevertheless, for the ZiG to succeed, authorities also need to adopt advanced technologies in gold production tracking & monitoring to minimise the chances of gold leakages and illicit trading. Traceability measures help curb criminality as information such as the exact source of gold, holder of gold buying license, and amount of taxes paid on gold exports can be collected and analysed.
The current rampant illicit gold trading, as reported by Al Jazeera's Gold Mafia documentary, if not curtailed, will militate against the accumulation of gold reserves, which are crucial in supporting the value of the "structured currency."
With an adverse economic outlook, for instance, subdued global mineral commodity prices threatening the value of export receipts coupled with the El-Nino-induced drought that has affected the 2023/24 summer cropping season, there will be enormous spending pressure on the Treasury to cushion the vulnerable groups and the economy in general.
Just like it is the norm globally, the Treasury will need help from the RBZ (money printing) to meet the demand of the pending humanitarian and economic crisis.
The increase in ZiG money supply will only be permissible if there are enough gold reserves; hence, there is a need for a whole of-government approach to curb illicit gold trading.
Otherwise, the expected increase in import bill will render the ZiG worthless.
Again, the ZiG concept will require frequent auditing of physical gold and US dollar cash reserves backing the currency by reputable and independent audit institutions.
Suppose there are no trusted audits of the quantum of gold reserves in RBZ vaults versus issued structured currency, ZiG.
Source - the standard
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