Zim’s proposed structured currency, benefits and disadvantages

09 Feb, 2024 - 00:02 0 Views
Zim’s proposed structured currency, benefits and disadvantages Zim-grown horned melons (magaka emunzwa) are a major hit among buyers visiting the Zimbabwe Pavillion at the fruit Logistica underway in Germany. Zimbabwe exhibitors, led by Zimbabwe are testing the European markets on their take on horned melons. — Picture: ZimTrade

eBusiness Weekly

Tapiwanashe Mangwiro

In a bid to address the ongoing economic challenges hounding Zimbabwe, President Mnangagwa announced during a recent cabinet meeting that the government’s intention is to introduce a “Structured Currency.”

This move comes amid persistent hyperinflation, currency volatility and a struggling economy. The decision reflects government’s commitment to finding lasting innovative solutions to its financial woes and stabilising its monetary system.

A structured currency is a form of monetary system designed to enhance stability and manage inflationary pressures. Unlike traditional fiat currencies, which rely solely on government regulation and central bank policies, a structured currency incorporates elements of both fiat and commodity-backed currencies. It combines the flexibility of fiat money with the intrinsic value and stability of commodities, such as gold or other precious minerals.

One notable example of a structured currency is the gold standard, which prevailed in many economies during the 19th and early 20th centuries. Under the gold standard, the value of a country’s currency was directly linked to a specific quantity of gold held in reserve by the central bank.

This arrangement provided a fixed exchange rate and limited the government’s ability to manipulate the money supply, thereby promoting price stability and confidence in the currency.

However, Zimbabwe has grappled with severe economic challenges for decades, stemming from a combination of factors including political instability, alleged mismanagement and external interferences including sanctions.

The country’s hyperinflation reached astronomical levels in the late 2000s, leading to the abandonment of its national currency, the Zimbabwean dollar, in favour of a multi-currency system dominated mainly by the US dollar and South African Rand.

In 2019, the country re-introduced the local currency but it has struggled to find footing with cyclical periods of stability and weakness to the extent that citizens and businesses have moved towards re-dollarisation.

To put it into perspective how the currency has fared since February 2019, relative to the USD, our ZWL has depreciated 99,794 percent till today.

Experts believe introducing a structured currency holds several potential benefits for Zimbabwe’s economy including stability, credibility and diversification.

Analyst, Tafara Mtutu, said he can only imagine that they are talking about, Zimbabwe Gold (ZIG) as commodities would be very risky.

“Do I think that it will stabilise the economy? I don’t think so. Among many things, Zimbabwe needs a stable currency. ZIG, whether you say it is a stable thing, there are many other issues that we need to ask before we actually talk about our own currency,” he said.

Another economic observer, Enoch Rukarwa, said depending on how it is going to be structured, this instrument can aid in anchoring inflationary pressures bedevilling the operating environment.

“However, in order for the instrument to de-risk inflation and provide stability it has to be pegged to underlying assets with solid fundamentals especially hard assets like metal commodities,” he said.

“Whilst structured currency may offer benefits like diversification, hedge characteristics, the biggest challenge in our operating environment is confidence deficit. Already we have instruments that have failed to create the much-needed steam like ZIG, bond notes, bearer cheques, this instrument may also suffer the same fate especially when issued in the absence of an efficient enabling environment.”

According to Mtutu three main things, that come to mind are confidence, governance and our debt situation.

“Are people confident in their currency? That’s the first thing. The second thing is governance. Is there strong governance surrounding things like currency, monetary policy and fiscal policy? And then the third thing is our debt, the debt overhang that Zimbabwe has,” Mtutu added.

Zimbabwe currently has a debt overhang that is almost equal to its GDP.

So whatever currencies we have, whatever we are saying that we are baking it with, it really pales in comparison when you start talking about the debt that Zimbabwe has.

Mtutu believes that when all these things are fixed, Zimbabwe can then be integrated with the global community.

“And when that happens, one of the key things that you start to see is that you start to see demand for the local currency, even by foreigners. That is something that has been missing for years in Zimbabwe’s local macroeconomics.”

Economist, Tinevimbo Shava, believes that by pegging the currency to a tangible asset or basket of commodities, Zimbabwe can mitigate the risk of hyperinflation and currency volatility, providing greater stability for businesses and consumers.

“The structure of the currency allows for more precise control over the money supply, helping to curb inflationary pressures and maintain price stability in the long term,” Shava added.

Another economist, Gladys Shumbambiri-Mutsopotsi said; “A structured currency backed by valuable commodities can enhance the credibility and trustworthiness of Zimbabwe’s monetary system, attracting foreign investment and fostering economic growth.”

She also added that by diversifying its monetary reserves beyond traditional fiat currencies, Zimbabwe can reduce its reliance on external factors and safeguard against economic shocks.

However, they also noted that the implementation of a structured currency also poses several challenges and risks which include commodity volatility and policy coordination.

“The value of commodities such as gold can fluctuate significantly in response to global market conditions, potentially exposing Zimbabwe’s currency to volatility and instability,” Shumbambiri-Mutsopotsi opined.

“Tying the currency to specific commodities may exacerbate Zimbabwe’s dependence on those resources, making the economy vulnerable to fluctuations in their prices and availability.”

According to Shava, effective management of a structured currency requires close coordination between fiscal and monetary authorities, as well as robust regulatory frameworks to prevent abuse and manipulation.

He added; “Transitioning to a new monetary system can be complex and disruptive, requiring careful planning and stakeholder engagement to minimise negative impacts on businesses and individuals.”

Zimbabwe’s decision to introduce a structured currency represents a bold step towards addressing its long-standing economic challenges and restoring confidence in its monetary system.

While the road ahead may be fraught with challenges, the potential benefits of greater stability, credibility and control over inflation make it a promising endeavour for the country’s future prosperity.

As the country embarks on this journey, analysts said effective governance, sound economic policies and international cooperation will be crucial in ensuring the success of its structured currency initiative.

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