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RBZ has mountain to climb in building trust



LEADING investment firm Imara Asset Management has poked holes into the recently announced Monetary Policy Statement, casting doubts on the central bank’s claims that the new Zimbabwe Gold (ZiG) currency would be backed by the country’s gold reserves.


Incoming Reserve Bank of Zimbabwe governor John Mushayavanhu early this month launched ZiG which effectively replaced the Zimbabwe dollar known as ZWL after the local unit lost its value due to rising inflation. Mushayavanhu said the new currency would be backed by gold and foreign currency reserves. Gold is the southern African nation’s top foreign currency earner.

The Monetary Policy Statement presented by the new governor was also announced at the same time as Statutory Instrument 60 was promulgated and adds flesh to the new currency.

The starting value of the currency should be determined by a combination of the London gold fix price as at 4 April 2024 and the closing interbank exchange rate as at 5 April 2024.

Imara, in its latest research note to investors, questioned how the ZiG’s price will be determined after that was not made clear in the Monetary Policy Statement (determined by a “refined interbank foreign exchange market”).

Statutory Instrument 60, which gives legal effect to the new currency, does provide brief insight into the envisaged ZiG pricing, which sounds complicated.

According to Statutory Instrument 60, ongoing ZiG value shall be “determined by the inflation differential between ZiG and the United States dollar inflation rates and the movement in the price of the basket of precious metals (mainly gold) and valuable minerals held as reserves by the Reserve Bank.”

The applicable weights will be determined by the composition of reserve assets.

“So the bottom line to all of the above in our view is that the value of the ZiG on any given day will be determined by its supply and demand; it will not be based upon the gold price as it is not convertible into gold from what we can establish,” John Legat, the Imara Asset Management chief executive, wrote.

“We also doubt that the refined interbank foreign exchange market will be any different to the one we have had up to now; in short, it will likely be a controlled rate engineered by the RBZ rather than one set by the commercial banks. That implies that there will be a black market rate in ZiG just as there was in the ZWL and that will be determined by supply and demand. Too much supply and the rate will devalue irrespective of the value of Zimbabwe’s foreign reserves or the gold price. We stand to be corrected on this as it is still early days as yet but at the moment the ZiG looks to be a redenominated form of the ZWL.

“At the end of the day however, the success or failure of the ZiG will as always boil down to trust. As we wrote on several occasions last year under the theme of ‘Once bitten, twice shy’, the general public and, importantly, foreign investors have close to zero trust in the Zimbabwean economic authorities for obvious reasons. It will therefore be up to the new Governor to work to rebuild that trust by showing that the ZiG performs as the label on its tin suggests it should. If it doesn’t and ZiG is created to fund roads, for example, or civil servants’ salaries, then the ZiG will go the same way as the ZWD and the ZWL, but rather faster.”

In 2008, former central bank governor. Gideon Gono, removed three zeroes (several times as it turned out) through a re-denomination of the Zimbabwe dollar, the ZWD.
Eight years later, his successor John Mangudya created electronic US dollars and called them RTGS dollars under the illusion that they were valued one-to-one, backed, he assured us, by a US dollar loan from Afreximbank.

“This was not true of course as an RTGS could not be convertible into a USD on demand at one to one (unless you were one of the lucky ones),” Legat says.

“Now in 2024, a cynic might argue that the new Governor has chosen to remove three zeroes, divide by two and half, change the name of the currency to a ZiG and will now attempt to ‘print’ gold or create ‘electronic’ gold under the illusion that a ZiG is backed by mainly gold, but not convertible into gold. In short, Dr John Mushayavanhu has his work cut out to persuade the markets that this viewpoint is totally wrong. Time is sadly not on his side.” 

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