ZiG: A possible end to currency crisis

19 Apr, 2024 - 00:04 0 Views
ZiG: A possible end  to currency crisis ZiG

eBusiness Weekly

Dr Keen Mhlanga

A currency crisis is defined as a sudden and steep decrease in the value of a country’s currency, which has a detrimental impact on the entire economy.

The Reserve Bank of Zimbabwe released Zimbabwe’s first banknotes (ZWD) in 1980, coinciding with Zimbabwe’s independence.

These notes replaced the Rhodesian dollar’s circulation banknotes at par.

The first set of banknotes ranged from $2 to $20 and were signed by Dr Desmond Krogh, the Reserve Bank of Rhodesia’s last Governor since 1973.

From 1994 to 1997, the Reserve Bank released a new series of notes ranging from $2 to $100, while the $2 banknote was discontinued and replaced by a coin in 1997.

As rising inflation began to have an impact on the Zimbabwean dollar’s purchasing power, the $500 and $1 000 banknotes were released with stronger anti-counterfeiting features between 2001 and 2005.

In May 2003, the Reserve Bank permitted the Cargill Cotton Group to issue emergency bearer cheques to cotton producers through a Standard Chartered Zimbabwe branch in Harare. Cargill issued these checks owing to a cash constraint caused by significant yearly inflation.

On August 8, 2003, the Reserve Bank issued special traveller’s cheques in six denominations ranging from $1 000 to $100 000.

The traveller’s cheques were short-lived and unpopular because they could only be used once, the user had to present proof of identification when using the cheques and the banks charged a commission fee for their use.

On September 26, 2003, the Reserve Bank released its own Bearer Cheques in denominations ranging from $5 000 to $20 000.

These and subsequent issues of the first and second dollars were time-limited and lacked sophisticated anti-counterfeiting mechanisms found on many modern banknotes. In the first half of 2006, new $50 000 and $100 000 bills were issued.

Starting August 1, 2006, banknotes of the second dollar (ZWN) with less complex designs replaced those of the first dollar at a ratio of 1 000 to 1. Additional denominations ranging from $5 000 to $500 million were issued between August 2006 and May 2008.

In the second quarter of 2008, special agro-cheques (agricultural cheques) in amounts ranging from $5 billion to $100 billion were issued while the currency exchange rate was floated.

Because the functions were similar to bearer cheques, it was widely used as prices continued to climb. In the closing months of the second dollar, the $200 000 cheque was the lowest legal money denomination.

From August 1, 2008, the third dollar (ZWR) banknotes, which were created for the abandoned second phase of the 2006 redenomination, replaced the second dollar bills at a ratio of 10 billion to one. On January 1, 2009, the bearer and agro-cheques for the second dollar were phased away, as were the lesser denominations for the third dollar.

Despite the reform, the Reserve Bank issued multiple high-value denominations of up to $100 trillion between September 2008 and January 2009, which simply tracked the cash rate rather than the black market rates.

On February 2, 2009, banknotes of the fourth dollar (ZWL) were issued to replace those of the third dollar at a ratio of one trillion to one.

The third dollar banknotes were supposed to be legal currency until June 30, 2009, however, they were completely withdrawn from circulation when the Zimbabwe dollar was suspended on April 12, 2009.

To combat hyperinflation, a multi-currency system comprising the US dollar and other major currencies, such as the euro, British pound and South African Rand, was implemented in 2009.

The Zimbabwe dollar was demonetised as the usage of several currencies became more prevalent. In December 2016, the Reserve Bank issued the bond note, which it claims has the same value as the US dollar.

The Zimbabwe dollar, often known as the RTGS, was reintroduced in 2018. In 2019, the US dollar was banned in local transactions.

Gold coins were launched in 2022 to help stabilise its weakening currency and then deployed gold-backed digital currency in 2023.

The introduction of a new currency, known as the Zimbabwean Gold (ZiG), has a mark on the economy.

The value of this money is connected to the price of gold, which distinguishes it from previous currencies.

The currency began circulating in early April, so it is highly expected that the fresh batch of notes will solve the long-standing currency woes.

This time, the Government used its strength in natural resources to address currency difficulties.

Zimbabwe’s mining sector is very varied, with about 40 different minerals. The main minerals include platinum group metals (PGM), chrome, gold, coal, lithium and diamonds.

The country has the world’s second-largest platinum deposit and high-grade chromium ores, totalling around 2,8 billion tonnes of PGM and 10 billion tonnes of chromium ore.

The gold standard, a monetary system in which the standard economic unit of account is based on a set amount of gold, used gold to back up currency.

The gold standard served as the foundation for the international monetary system from the 1870s to the early 1920s, the late 1920s to 1932, and 1944 until 1971, when the United States unilaterally terminated the US dollar’s convertibility to gold, effectively ending the Bretton Woods System.

Many states still have significant gold reserves. The gold standard avoids inflation because governments and banks cannot control the money supply, such as by over issuing money. The gold standard also regulates pricing and foreign exchange rates.

Pegging currency against gold implies that when the value of gold rises, so will the value of the currency.

If the price falls, the value of the currency falls. Also, mechanisms must be put in place to verify that the money issued is equal to the value of gold reserves. This basic is the primary driver of currency value; by overprinting, we may trigger inflation.

Banking sector confidence in Zimbabwe has declined, however, the introduction of International Auditors to monitor gold reserves and money supply on a yearly basis may restore people’s confidence and trust.

International adoption is something the Government should focus on because the structured currency’s standard is more apparent than other currencies that lack primary backing.

If it is audited and proven internationally or regionally, it will increase trade and attract foreign currency.

Public acceptance of the new currency should be a source of concern. Investing in fundamental means of teaching the nation and key stakeholders about the money, as well as comprehensive understanding, can encourage and improve its usage.

Putting an end to the constant reintroduction of currencies is entirely determined by public acceptability and the currency’s worth should be agreed upon by all.

The black market rate is 1:15, whereas the official rate is 1:13.3437. This disparity will encourage the resurgence of an active black market. The availability of currency at the official rate should be addressed.

Effective internal controls and money supply security, as well as obtaining market intelligence on the breadth of illegal activities. Raising awareness among businesses and the general public can help battle the black market.

Dr Keen Mhlanga

Dr Keen Mhlanga is an Investment Advisor with high skills in Finance. He is the Executive Chairman of FinKing Financial Advisory. Send your feedback to [email protected], contact him on 0777597526.

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