Opinion / Columnist
Zimbabwe's currency conundrum: Meagre gold reserves can't sustain the ZiG
02 Oct 2024 at 20:53hrs | Views
Today, during his State of the Nation Address (SONA), President Emmerson Dambudzo Mnangagwa announced that the government would set aside 50% mineral royalties to shore up the local currency.
The Zimbabwe Gold (ZiG or ZWG), which was introduced on 5th April 2024 - and is supposed to be backed by gold and foreign currency reserves - has already depreciated in spectacular fashion.
In just five months, the local currency, which started off at ZWG13,56 to the greenback, had fallen to a staggering ZWG24.30, after a Reserve Bank of Zimbabwe (RBZ) devaluation a week ago.
The parallel market, on the other hand, had not been kind, with the ZiG now trading around 30 and above to US$1.
Ironically, all this is taking place when the global gold price is actually increasing - which should have resulted in a proportional strengthening of the ZiG.
However, the opposition is true.
The question then is: Why?
To directly receive articles from Tendai Ruben Mbofana, please join his WhatsApp Group on: https://chat.whatsapp.com/CBQVPGODBPQG969OBVLyeT
Zimbabwe's economic woes have been well-documented.
From hyperinflation to currency instability, the southern African nation has struggled to find its footing.
However, to truly revitalize the economy, Zimbabwe must address its reserve woes.
This article explores the necessary gold and foreign currency reserves required to sufficiently back the ZiG and propel Zimbabwe toward economic stability.
To establish a stable currency, Zimbabwe needs substantial gold and foreign currency reserves.
On 7th July 2024, it was reported that cash and mineral reserves backing the new currency had risen from the initial US$285 million to approximately US$370 million.
RBZ Governor, John Mushayavanhu said, "The total reserves have progressively increased by about 30 percent, from US$285 million as of April 5, 2024 to above US$370 million as at end of June 2024."
Nonetheless, is this enough to buttress a currency?
According to the World Bank and International Monetary Fund (IMF), countries aiming for a gold-backed currency typically maintain reserves equivalent to 20-40% of their circulating money supply and 3-6 months' worth of import coverage is essential.
This translates to approximately US$3.5-6 billion in total reserves.
Currently, Zimbabwe's gold reserves stand at a meagre 2.5 tonnes (which translates to around US$155.70 million), which, with other foreign currency reserves, totals US$370 million.
This calculation is based on the September 2024 gold price of US$62.28 million per tonne.
Clearly, these reserves are woefully inadequate based on the standards by the World Bank and IMF - even with Mnangagwa's announcement of setting aside 50% mineral royalties.
Zimbabwe, therefore, faces significant challenges in building its reserves.
The country's economy relies heavily on exports of tobacco, gold, platinum, diamonds, lithium, and other minerals, but these are not nearly enough to build the required foreign currency reserves.
It is undeniable that Zimbabwe needs to do more in terms of reviving its export base - top of which should be a vibrant industrial sector.
To overcome these hurdles, Zimbabwe must diversify its economy through agriculture, manufacturing, and tourism.
Improving the investment climate by enhancing governance and infrastructure is also crucial.
Right now, Zimbabwe ranks amongst the most corrupt countries in the world, which scored 149 out of 180 countries on the Transparency International Corruption Perception Index for 2023, thereby classified as ‘highly corrupt'?
Increasing gold production and exports will help boost reserves.
Yet. instead of capitalizing on our vast gold, diamond, and lithium deposits, the country is reportedly losing about US$1.8 billion annually to the smuggling of our minerals.
Other nations offer valuable lessons.
Singapore's 100% gold backing (at US$340 billion foreign reserves in 2022) provides stability, while China's 2-3% gold backing and substantial foreign currency reserves (at US$3.2 trillion foreign reserves in 2022) demonstrate prudent management.
South Africa has 15% gold backing, with US$45 billion foreign reserves in 2022.
Hong Kong's 100% foreign currency backing ensures stability, providing a model for Zimbabwe to follow.
In conclusion, to achieve economic stability, Zimbabwe must attain minimum reserve requirements within the next two to three years.
By 2025-2030, reserves should increase to ideal levels.
In the long term, Zimbabwe must maintain economic stability and currency strength.
Zimbabwe's new currency, the ZiG, offers a fresh start.
However, without substantial gold and foreign currency reserves, the economy remains vulnerable.
By addressing reserve requirements, diversifying the economy, and strengthening governance, Zimbabwe can revitalize the ZiG, attract foreign investment, enhance economic stability, and improve living standards.
Zimbabwe should develop a comprehensive reserve-building plan and engage international experts for guidance.
Foster public-private partnerships for economic growth and enhance transparency and accountability to ensure success.
Zimbabwe's economic future hinges on its ability to build robust reserves.
By learning from international examples, addressing challenges, and implementing effective solutions, the ZiG can become a symbol of economic stability and growth.
© Tendai Ruben Mbofana is a social justice advocate and writer. Please feel free to WhatsApp or Call: +263715667700 | +263782283975, or email: mbofana.tendairuben73@gmail.com, or visit website: https://mbofanatendairuben.news.blog/
The Zimbabwe Gold (ZiG or ZWG), which was introduced on 5th April 2024 - and is supposed to be backed by gold and foreign currency reserves - has already depreciated in spectacular fashion.
In just five months, the local currency, which started off at ZWG13,56 to the greenback, had fallen to a staggering ZWG24.30, after a Reserve Bank of Zimbabwe (RBZ) devaluation a week ago.
The parallel market, on the other hand, had not been kind, with the ZiG now trading around 30 and above to US$1.
Ironically, all this is taking place when the global gold price is actually increasing - which should have resulted in a proportional strengthening of the ZiG.
However, the opposition is true.
The question then is: Why?
To directly receive articles from Tendai Ruben Mbofana, please join his WhatsApp Group on: https://chat.whatsapp.com/CBQVPGODBPQG969OBVLyeT
Zimbabwe's economic woes have been well-documented.
From hyperinflation to currency instability, the southern African nation has struggled to find its footing.
However, to truly revitalize the economy, Zimbabwe must address its reserve woes.
This article explores the necessary gold and foreign currency reserves required to sufficiently back the ZiG and propel Zimbabwe toward economic stability.
To establish a stable currency, Zimbabwe needs substantial gold and foreign currency reserves.
On 7th July 2024, it was reported that cash and mineral reserves backing the new currency had risen from the initial US$285 million to approximately US$370 million.
RBZ Governor, John Mushayavanhu said, "The total reserves have progressively increased by about 30 percent, from US$285 million as of April 5, 2024 to above US$370 million as at end of June 2024."
Nonetheless, is this enough to buttress a currency?
According to the World Bank and International Monetary Fund (IMF), countries aiming for a gold-backed currency typically maintain reserves equivalent to 20-40% of their circulating money supply and 3-6 months' worth of import coverage is essential.
This translates to approximately US$3.5-6 billion in total reserves.
Currently, Zimbabwe's gold reserves stand at a meagre 2.5 tonnes (which translates to around US$155.70 million), which, with other foreign currency reserves, totals US$370 million.
This calculation is based on the September 2024 gold price of US$62.28 million per tonne.
Clearly, these reserves are woefully inadequate based on the standards by the World Bank and IMF - even with Mnangagwa's announcement of setting aside 50% mineral royalties.
Zimbabwe, therefore, faces significant challenges in building its reserves.
The country's economy relies heavily on exports of tobacco, gold, platinum, diamonds, lithium, and other minerals, but these are not nearly enough to build the required foreign currency reserves.
It is undeniable that Zimbabwe needs to do more in terms of reviving its export base - top of which should be a vibrant industrial sector.
To overcome these hurdles, Zimbabwe must diversify its economy through agriculture, manufacturing, and tourism.
Improving the investment climate by enhancing governance and infrastructure is also crucial.
Right now, Zimbabwe ranks amongst the most corrupt countries in the world, which scored 149 out of 180 countries on the Transparency International Corruption Perception Index for 2023, thereby classified as ‘highly corrupt'?
Increasing gold production and exports will help boost reserves.
Yet. instead of capitalizing on our vast gold, diamond, and lithium deposits, the country is reportedly losing about US$1.8 billion annually to the smuggling of our minerals.
Other nations offer valuable lessons.
Singapore's 100% gold backing (at US$340 billion foreign reserves in 2022) provides stability, while China's 2-3% gold backing and substantial foreign currency reserves (at US$3.2 trillion foreign reserves in 2022) demonstrate prudent management.
South Africa has 15% gold backing, with US$45 billion foreign reserves in 2022.
Hong Kong's 100% foreign currency backing ensures stability, providing a model for Zimbabwe to follow.
In conclusion, to achieve economic stability, Zimbabwe must attain minimum reserve requirements within the next two to three years.
By 2025-2030, reserves should increase to ideal levels.
In the long term, Zimbabwe must maintain economic stability and currency strength.
Zimbabwe's new currency, the ZiG, offers a fresh start.
However, without substantial gold and foreign currency reserves, the economy remains vulnerable.
By addressing reserve requirements, diversifying the economy, and strengthening governance, Zimbabwe can revitalize the ZiG, attract foreign investment, enhance economic stability, and improve living standards.
Zimbabwe should develop a comprehensive reserve-building plan and engage international experts for guidance.
Foster public-private partnerships for economic growth and enhance transparency and accountability to ensure success.
Zimbabwe's economic future hinges on its ability to build robust reserves.
By learning from international examples, addressing challenges, and implementing effective solutions, the ZiG can become a symbol of economic stability and growth.
© Tendai Ruben Mbofana is a social justice advocate and writer. Please feel free to WhatsApp or Call: +263715667700 | +263782283975, or email: mbofana.tendairuben73@gmail.com, or visit website: https://mbofanatendairuben.news.blog/
Source - Tendai Ruben Mbofana
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