OPINION: Mark Mtombeni on navigating the currency conundrum in Zimbabwe

In recent years, Zimbabwe has confronted formidable economic challenges, including currency volatility, liquidity constraints, and an overreliance on foreign currencies.

Amidst these complexities, discussions surrounding the adoption of a structured currency, particularly one backed by gold reserves, have gained momentum.

This article seeks to delve into the concept of a structured currency, evaluate Zimbabwe’s gold-backed currency (ZiG), and provide expert insights into critical monetary policy improvements needed for sustainable economic stability.

Understanding Structured Currency:

Structured currencies are monetary systems backed by tangible assets such as gold or commodities, offering stability and intrinsic value. Unlike fiat currencies, they aim to mitigate the risk of hyperinflation and currency devaluation by anchoring their worth in tangible assets.

Characteristics of a Structured Currency:

Backed by Tangible Assets: Ensures intrinsic value and stability.

Stability and Predictability: Provides confidence to users and investors.

Limited Supply: Prevents overprinting and inflationary pressures.

Transparency and Accountability: Ensures clear mechanisms for asset backing and currency issuance.

Evaluating Zimbabwe’s Gold-Backed Currency (ZiG):

While ZiG aligns with the principles of a structured currency, challenges abound. The Reserve Bank of Zimbabwe’s (RBZ) precarious financial situation, characterised by a substantial auction backlog ($740 million) and reserves of only $300 million, raises concerns.

Furthermore, the RBZ’s decision to withhold ZiG payments for at least a year exacerbates uncertainties.

Monetary Policy Improvements:

Transparency and Accountability:

In the past, Zimbabwe has grappled with a lack of transparency and accountability in monetary policy, leading to market distrust and volatility. Corrective measures must include open disclosure of treasury bill issuance, government expenditure, and currency conversion mechanisms. This entails establishing clear reporting mechanisms and regular audits to ensure compliance with transparency standards.

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Effective Reserve Management:

Historically, Zimbabwe has struggled with inadequate reserves to back its currency, exacerbating liquidity challenges and currency instability. Remedial action involves prioritising reserve accumulation through prudent fiscal management and strategic investment. Additionally, judicious utilisation of reserves, coupled with proactive risk management strategies, is essential to safeguard currency stability and mitigate liquidity risks.

Market Participation and Regulation:

Zimbabwe’s currency market has been marred by restrictions and a lack of regulatory clarity, fostering black market reliance and hindering market efficiency. To address this, reforms should focus on promoting market participation by removing barriers to entry, enhancing regulatory oversight, and fostering competition. This entails implementing transparent and consistent regulatory frameworks that foster market integrity and ensure a level playing field for all participants.

Sound Economic Governance:

Weak economic governance in Zimbabwe has impeded fiscal discipline and undermined monetary stability. To remedy this, a concerted effort is needed to uphold principles of sound economic governance, including transparent budgeting, prudent fiscal management, and independent central bank oversight. Strengthening institutional capacity, enhancing accountability mechanisms, and fostering a culture of fiscal responsibility are crucial steps towards restoring confidence in the financial system.

Challenges Facing ZiG Amidst US Dollar Reliance:

Zimbabwe’s adoption of the Zimbabwe gold (ZiG) currency, while promising in its potential to provide stability, is not without its challenges. Chief among these challenges is the country’s entrenched reliance on the US dollar for essential transactions. Here’s a breakdown of the key obstacles ZiG faces:

1. Essential Expenses in USD:

Ordinary Zimbabweans encounter numerous unavoidable expenses denominated in US dollars, including rent, fuel, school fees, healthcare, government services, and external travel. These USD-denominated costs represent a significant portion of individuals’ expenditures, particularly rent, which stands out as the largest USD expense for many.

2. Limited Access to USD:

Despite earning income in ZiG, individuals face obstacles in converting their local currency to USD to cover essential expenses. Official channels for currency conversion may be insufficient, leading people to turn to the black market, where USD is accessible but often at inflated rates.

3. Persistence of the Black Market:

The black market plays a crucial role in providing vital access to USD for individuals and businesses unable to obtain it through official channels.Attempts to eradicate the black market have been unsuccessful, as it fulfills a widespread need in the absence of accessible alternatives.

Given Zimbabwe’s economic landscape and the challenges facing ZiG, hyperinflation remains a distinct possibility without significant policy reforms. While structured currencies offer potential stability, Zimbabwe’s situation requires immediate action to address fiscal imbalances, enhance transparency, and restore market confidence.

Conclusion

Navigating Zimbabwe’s currency conundrum demands a comprehensive approach, combining structural reforms with transparent and accountable monetary policies. While ZiG holds promise, success hinges on effective governance, prudent economic management, and collaborative efforts to address systemic challenges. Without decisive action, the specter of hyperinflation looms large, underscoring the urgency of meaningful reforms for Zimbabwe’s economic future.

This article was coordinated by Fungai Antony Sox, a Harare-based communications consultant.

Mark Hussain Mtombeni is a qualified accountant with the Midlands State University and the Chartered Accountants Academy. He boasts expertise in Audit, Financial Reporting, and Tax issues having completed his articles with HLB Zimbabwe Chartered Accountants.

He currently consults for several businesses across sectors and the views expressed here do not reflect the views of entities he associates with. He can be reached on thefinanceguy22@gmail.com or +263 719 412 008.