Zim courts Afreximbank over gold buying facility

Business Writer

Zimbabwe has reportedly initiated engagements with some regional financial institutions to mobilise funding to purchase large stocks of bullion it needs to back its currency to curb chronic inflation and ensure durable stability, Business Weekly can reveal.

Multiple sources at the Reserve Bank of Zimbabwe (RBZ) and the Ministry of Finance, Economic Development and Investment Promotion, said in separate interviews the authorities were already working on the latest initiative.

This follows the announcement by President Mnangagwa during the first Cabinet meeting a fortnight ago that the country will adopt a structured currency to stabilise the economy.

“What the President said during the Cabinet meeting was essentially providing a direction, and this is what the central bank and the Finance Ministry are working on,” said one source familiar with the developments. “So, essentially, the structured currency will be a domestic currency backed by gold.

Discussions with some regional institutions have already begun to raise funds for building up physical stocks”.

The source declined to reveal details on the targeted quantity or the required amount, citing confidentiality issues. However, other sources hinted at the possibility of involving Afreximbank, which has provided credit facilities to Zimbabwe in recent years.

“It is a delicate issue that the authorities are managing carefully until fruition,” said the source.

Highlighting the desire for a stable currency, Finance, Economic Development and Investment Promotion Minister, Professor Mthuli Ncube, said attaining a stable currency could be achieved by linking the exchange rate to assets like gold.

“Really, this is a quest for currency stability,” Mthuli said. “What has emerged over the years is the US [dollar] being the most dominant. Going forward, we want to make sure that the growth we have achieved so far—which is very strong is maintained.

“We can only do that if we have further stability in the domestic currency and the way to do that is perhaps to link the exchange rate to some hard asset such as gold.”

The Zimbabwe dollar, reintroduced in 2019 after a 10 year hiatus, has suffered immensely. Currently, its official exchange rate sits at 12,313 to 1 US dollar, but black-market rates are significantly higher. The instability has eroded trust in the currency, causing inflation.

Some analysts say gold, a long-held symbol of stability and value, may offer a solution.

By linking the local currency to gold reserves, analysts hope stability will be achieved.

“Pegging the Zimbabwe dollar to a stable asset like gold will potentially slow down price increases and ultimately curb inflation,” Harare-based economist Carlos Tadya said.

“Considering its historical reputation as a stable store of value, it could be a solution.”
Another analyst, Tobias Musara, said linking the value of the local currency to gold reserves could be a

“potential path to stabilisation.” The market is looking to gold, a symbol of stability and value, as a potential answer,” Musara said. “We hope that linking the local currency to gold reserves will bring about much-needed stability.”

However, the path to a gold-backed currency is not paved with “gold bullion,” observers noted. Some have raised serious doubts about the country’s capacity to accumulate sufficient gold reserves to effectively support its domestic currency.

They warned that accumulating enough gold to effectively support the currency is a major hurdle.

“Do not expect a smooth ride to a gold-backed currency,” said a Harare-based economist. Calls to seek comment from the central bank governor Dr John Mangudya were not answered.

Gold: A glimmer of hope for global finance!

Following lengthy discussions on various currency and commodity baskets, the BRICS nations led by Russia and China last year reportedly settled on gold as the foundation for a proposed new international currency system meant to rival the US dollar and Euro.

Drawing parallels to the Bretton Woods agreement of 1944, the BRICS’ proposal suggests a return to a gold-backed international currency system. This echoes the post-Great Depression attempt to stabilise global finance by pegging currencies to gold, with the US dollar serving as the central anchor at a fixed rate. While the Bretton Woods system fostered two decades of economic prosperity and fixed exchange rates, it ultimately unraveled in 1971 when the US decoupled the dollar from gold.

In 2019, Malaysia’s Prime Minister Mahathir Mohammad proposed a Pan-Asian currency based on gold.

“At the moment we have to depend upon the U.S. dollar but the US dollar is also not stable. So the currency that we propose should be based on gold because gold is much more stable,” he said then.”

In 2009, then-Libyan leader Muammar Gaddafi proposed a Pan-African currency called the gold dinar, drawing inspiration from the gold dinar coins used by the historical Arab Caliphates that once ruled North Africa. This proposal aimed to reduce dependence on the US dollar and foster economic unity within the continent.

However, due to the unrest in Libya beginning in 2011, the gold dinar initiative never materialised.

In 2009, echoing similar concerns about the existing international monetary system, then-Governor of the People’s Bank of China, Zhou Xiaochuan, proposed a new reserve currency. He argued that it should be “anchored to a stable benchmark,” like gold.