Structured currency set to be launched this week

IN a bid to address currency volatility and exchange rate-driven inflation badly battering the economy amid arbitrage, the Zimbabwean government will next week launch a “structured currency” which the market has been waiting for to pick the new macroeconomic trajectory.

BERNARD MPOFU

Zimbabwe, buffeted by economic turmoil for over two decades now, has the highest inflation and one of the lowest valued currency units in the world.

Well-informed sources told The NewsHawks that outgoing Reserve Bank of Zimbabwe (RBZ) governor John Mangudya — officially replaced by his successor John Mushayavanhu yesterday — will launch the new currency after Easter holidays at the end of the week – almost certainly on Friday.

 Mangudya will launch the currency with Mushayavanhu playing a prominent role in the process as the incoming governor tasked to defend that new unit, while fighting inflation.

The RBZ, banker and advisor to government, is responsible for formulation and implementation of monetary policy to ensure low and stable inflation levels, while protecting the value of the currency.

A source said: “The new currency will be launched at the end of the week after the Easter holidays — on Friday. It was supposed to have been launched much earlier in the year when the monetary policy statement was due in January or February, but it was delayed. Then 28 March was set as the new date, but there were still certain things that were not yet in place. So next week is the new date. Its value will be determined by the value of the ZiG, an RBZ gold-backed token.

 “The official appointment and the role of Mushayavanhu was also an issue. Prior to that there were issues of gold and United States dollar reserves accumulation which were supposed to be in place before its announcement. One of the functions of the RBZ is management of the country’s gold and foreign exchange assets. This was a key process is coming up with the structured currency.”

Zimbabwe is battling the double whammy of currency volatility and inflation. Currency volatility occurs when there are rapid changes to the exchange rate of a currency in a short period of time.

Political and economic conditions have a considerable bearing on the exchange rate, thus its fluctuations. Inflation, both cost-pull and demand-pull, and foreign currency market operations also have an impact on the exchange rate.

 This has been the case with the increasingly worthless Zimbabwean dollar now trading between US$1:ZW$25000 and US$1:ZW$30000. Sources said government has for a while been building some reserves to provide an anchor and to defend the currency which will inevitably plunge to a new death spiral unless there is a reserves war chest to support it.

Another source said: “Authorities have been buying gold since 2022 and they have also been building some US dollar reserves through the export retention scheme. So they are ready for the new currency launch, but the real question is how long will the honeymoon last. Will it hold without government resolving the broader political and economic crisis? When the Zimbabwean dollar was brought back in 2019 after a decade of decimation and demonetisation, it did not last long in a firm footing because it was not well-grounded.

No sooner had the Zimdollar been brought back as legal tender in 2019 than it started losing value even though authorities had insisted the exchange rate would hover around US$1:ZW$1 for a long time.”

 Around that time, President Emmerson Mnangagwa even superficially claimed the bond note, which represented the Zimdollar in the market since 2016, was the strongest currency in the region.

However, it took only five years to see that the Zimdollar was a liability as a currency. At the moment, the Zimdollar is on yet another calamitous plunge.

Contacted for comment, Mangudya said the delay in delivering the monetary policy statement was necessitated by the need to finalise arrangements to ensure that the structured currency is well-supported to sustain exchange rate and price stability.

Exchange rate volatility has of late been the biggest driver of sharp price increases and inflation which is now officially at 55.3% for March. Annual inflation quickened to 55.3% in March from 47.6% in February, the Zimbabwe National Statistics Agency said on Wednesday. However, independent

American economist Professor Steve Hanke says Zimbabwe has the highest inflation in the world at 1 521%.

Mangudya said: “The idea behind the structured currency is to ensure exchange rate and price stability as the President has already explained. The Minister of Finance has also partly explained that the new currency will allow establishment of a quasi-Currency Board to help ensuring stability. The new currency will be backed by precious metals such gold and foreign currency.”

The International Monetary Fund says a currency board combines three elements: an exchange rate that is fixed to an “anchor currency,” automatic convertibility (that is, the right to exchange domestic currency at this fixed rate whenever desired), and a long-term commitment to the system, which is often set out directly in the central bank law.

The main reason for countries to contemplate a currency board is to pursue a visible anti-inflationary policy. Zimbabwe will not have a full currency board, but a framework of that quasi-structure.

 A currency board system can be credible only if the central bank holds sufficient official foreign exchange reserves to at least cover the entire narrow money supply. In this way, financial markets and the public at large can be assured that every domestic currency bill is backed by an equivalent amount of foreign currency in the official coffers.

A Treasury source said mobilisation of gold to support the new currency began in October 2022 when government came up with a policy of 50% royalties on precious metals to be paid in kind to the RBZ.

That became the basis of building reserves to anchor the structured currency, which will be similar to the gold-backed digital tokens named ZiG.

“The objective is to restore value, trust and confidence in the currency. Some of the main characteristics of money include measure and store of value, as well as acceptability. The structured currency has to have those basic characteristics.

 Apart from gold, foreign currency has been mobilised to back the currency through the 25% forex liquidation policy on export proceeds,” the source said.

Zimbabwe’s economy which plateaued and stabilised in crisis in recent years due to extended periods of mismanagement, incompetence, policy inconsistencies, leadership failures, as well as poor governance and corruption, has over the past years experienced cycles of currency volatility which have prompted authorities to go back to the drawing board to structure a new currency.

Economic commentators classify a structured currency as a form of monetary system designed to enhance stability and manage inflationary pressures. Unlike fiat currencies which rely on government regulation and central bank policies, a structured currency takes the form of both fiat and commodity-backed currencies.

“Mobilising gold reserves has been on the central bank’s top agenda over the past few years. The digital currency will not replace the multi-currency system which is mainly dominated by the US dollar,” a Finance ministry official close to the arrangement told The NewsHawks.

“While many thought the 25% retention on export earnings was financing public spending, authorities took a deliberate decision to ensure that these proceeds together with the gold reserves would anchor the structured currency which will be launched next week.

“The launch has inadvertently led to delays in presenting the monetary policy statement by Mangudya who will deliver it with Mushayavanhu, the new implementing authority.”

Mangudya and his predecessors have traditionally presented the monetary policy either at the end of January or in February, but the statement will now come with the launch of the structured currency next week.

After 10 years at the helm, Mangudya will end his two terms at the end of April before going on vacation to allow Mushayavanhu to settle in comfortably and later joining the Mutapa Investment Fund as chief executive.

 In a recent interview with a local media outlet, Mangudya explained the situation.

“We are expecting monetary policy anytime soon. Currently, we are finalising measures to roll out what the President said in terms of the structured currency. This is so that we can have guaranteed price stability and stability of the exchange rate,” he said.

“So the delay in announcing the monetary policy statement is because we are working on a structured currency that is well-supported.”

Last July, Zimbabwe’s central bank introduced gold coins as an alternative store of value to the US dollar in the economy. In trying to complement the physical gold coins, the RBZ introduced the gold-backed digital tokens known as ZiG in May 2023.

The introduction of the gold-backed digital tokens came at a time when government was implementing a raft of measures to curtail inflation in the economy in order to rescue the collapsing local currency from being rejected by the market.

With effect from 5 October 2023, ZiG was announced as one of the means of payment for domestic transactions. The digital gold-backed tokens have been characterised by limited uptake as reflected by the value of gold purchased.

The structured currency, sources added, is meant to avoid looming hyperinflation and its ravages similar to the 2008 situation.

“The value of the structured currency will be determined by the value of the ZiG. After being introduced to the market, they will trade at around 1:1 against the greenback,” the source said.

“Once launched, banks will require up to a week or so to reconfigure their systems, rebase the balances in local currency, come up with opening foreign exchange rates and how it will used.

“When the structured currency comes, it will account for about 20% of transactions which essentially means it will occupy the space of bond notes in terms of market liquidity and transactions.”

 Last month, Mnangagwa said authorities were looking to introduce a “structured currency”, without explaining how that would work.

“Prudent fiscal and monetary policies and promotion of a conducive environment remain critically important for the stability and growth of our economy,” he said.

 “Accordingly, the fiscal and monetary authorities are implementing a raft of policy measures to arrest price increases, stabilise foreign exchange rate, maintain value for our currency and ultimately encourage savings. We shall soon be announcing the production of our structured currency.”

 After Mnangagwa’s remarks, Finance minister Mthuli Ncube said the structured currency is part of monetary reforms aimed at defending the value of the domestic currency.

 “What the president announced is what we may call necessary forward guidance, which means that the leader is announcing that Zimbabwe is on a path to further reforms on its currency and monetary system, which is a good thing for getting everyone geared up to realise that this is an important issue,” Ncube told the media during the Economic Commission for Africa press conference held in Victoria Falls last month.

“This is a quest for currency stability, but I’m still pleased that so far Zimbabwe has shown very strong growth.”

The Zimbabwean dollar was first introduced in 1980, following the country’s independence from British colonial rule. At the time of its introduction, the Zimbabwean dollar was equivalent to one British pound, stronger than the US dollar.

Throughout its turbulent history, the Zimbabwean dollar suffered from significant exchange rate instability and high inflation. After holding its own for about 17 years, the local currency plunged into the depths of depreciation in 1997 after Zimbabwe printed money to finance the Congo War and pay war veterans large outlays.

The land reform programme of 2000 ruined commercial agriculture and the economic mainstay, leaving the economy and currency in tatters amid surging inflation. Amid an economic meltdown, the Zimdollar was redenominated three times in 2006, 2008 and 2009), with denominations of up to ZW$100 trillion banknotes issued.

The RBZ issued various types of banknotes amid economic turmoil and hyperinflation, including the bearer cheques and special agrocheques (“agro” being short for agricultural) that circulated between 15 September 2003 and 31 December 2008: Use of the Zimbabwean dollar as an official currency was effectively abandoned on 12 April 2009.

 It was officially demonetised in 2015, with outstanding accounts able to be reimbursed until 30 April 2016. In late 2016, government introduced a batch of bond notes as a form of alternative currency.

On 24 June 2019, the RBZ abolished the multiple-currency system and replaced it with a new form of Zimdollar (RTGS system), which was the only official currency in the country between June 2019 and March 2020, after which multiple foreign currencies were allowed again.

 Government has extended the use of the multi-currency system to 2030 from the previous 2025 cut-off date. Through Statutory Instrument (SI) 218 of 2023, the US dollar will remain legal tender till 2030, working alongside with the structured currency which is coming on Friday next week.