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Is Zimbabwe finally winning its currency war?





Over the past three months, the Zimbabwean monetary and fiscal authorities have announced various measures to try to halt the depreciation of the Zimbabwean dollar by curbing speculative activity.

The latest of the measures is the introduction of gold coins into the market on 25 July by the Reserve Bank of Zimbabwe (RBZ), the country’s central bank.

According to the RBZ, the coins are an alternative stable investment product for value preservation, which should help to stabilize the exchange rate, and prices to curb inflation.

Announcing his mid-term monetary policy statement last week, RBZ Governor John Mangudya said the central bank was pleased by the uptake of the coins, adding that it plans to release smaller units of gold coins into the market in November this year.

The move is meant to allow ordinary Zimbabweans to buy them since the first coins released last month are exorbitantly priced, he said.

The coins entered the market at US$1 823.83, a figure which is beyond the reach of many.

“Following the successful launch of the gold coins on 25 July 2022, and in response to public demand, the Bank shall introduce and release into the market gold coins in units of a tenth ounce, quarter ounce and half an ounce for sale with effect from mid-November, 2022,” said Mangudya.

He said the features, characteristics, sale terms and conditions of the smaller coins shall remain the same as the current trading arrangements of the gold coins in circulation.

The gold coins have liquid asset status, prescribed asset status, can be tradable and used as collateral, and can be bought back.

Individuals, domestic corporates including institutional investors are allowed to buy the gold coins in both local and foreign currency while international buyers can only buy the coins in foreign currencies that include the US dollar, South African rand and the British pound.

Fluctuations will be experienced in the US dollar and Zimbabwean dollar prices as a result of the movement in the international price of gold and the exchange rate, Mangudya said.

He said the smallest coin, containing just over 3.11 grams of gold, will cost US$188.48 or local currency equivalent at the interbank rate, at one-tenth of the first gold coin released in July.

The coins, also known as the Mosi-Oa-Tunya, which means the Smoke that Thunders in the local language, referring to the Victoria Falls, weigh one troy ounce each with a purity of 22 carats.

Mangudya said the actual price of the small gold coin, when it is introduced, will be the world price of gold for one-tenth of a troy ounce plus a 5 percent minting and distribution fee.

The introduction of the gold coins is part of the central bank’s measures to tackle the country’s currency crisis through exchange rate stabilization.

Mangudya said as of 10 August, a total of 4 475 gold coins had been sold, realising $3.7 billion (about US$10.22 million), of which 90% was paid in local currency and the balance in foreign currency.

“The high demand for the gold coins will assist in mopping up excess liquidity from the market and thus strengthen the demand and enhance the value of the local currency,” the central bank governor said. “The Bank shall continue to release additional gold coins into the market on an ongoing basis in line with demand.”

Apart from releasing the gold coins, the central bank has been reviewing bank policy rates since the beginning of the year in line with exchange rates in a bid to tame inflation and bolster the Zimbabwean dollar.

The bank policy rate was increased from 60% in January 2022 to 80% in April and further to 200% in June 2022.

According to Mangudya, the increase in policy rates and its alignment to the minimum lending rate has gone a long way in reducing speculative borrowing and stabilising the exchange rate.

The central bank chief noted that the increase in interest rates and the introduction of the gold coins have gone a long way in preserving the value of the local currency, reducing liquidity in the market and reducing foreign currency demand on the parallel market and thus stabilising the exchange rate and prices.

Persistence Gwanyanya, the economist and member of the RBZ Monetary Policy Committee, said that the gold coins were a policy instrument that the RBZ was using to mop up excess liquidity from the few contractors, institutional investors and pension funds that hold the bulk of the country’s excess liquidity that is being used to drive up parallel market activity.

“As you drive demand for the gold coins, the Zimbabwean dollar strengthens. We have started seeing that happening and the Zimbabwean dollar will continue strengthening as the RBZ sucks liquidity from the market and from those with high volumes of local currency,” he said.

Gwanyanya said before the injection of the gold coins, the exchange rate on the parallel market had depreciated to 1 USD: $850 but a few weeks after, the rate firmed to around 1 USD: $750 and is continuing to strengthen with rates of 1 USD: $600 -$720 now in the market.

Zimbabwe reintroduced the local currency in 2019 after abandoning it in 2009 when it was hit by hyperinflation.

Confederation of Zimbabwe Retailers President Denford Mutashu said that the appetite for gold coins since its introduction was encouraging and the coins were providing much-needed competition to the US dollar.

“The parallel market exchange rate has not only stabilized but came down from $900:US$1 to the current average of $650:US$1. Consequently, prices of basic commodities came down with cooking oil price reducing from an average of US$56 per box to the current average of US$50 per box,” Mutashu said.

He, however, expressed concern that sugar prices continued to go up in local currency from an average of $609 000 per tonne last week to $709 000 per tonne on Monday this week.

“Business should ensure the consumers benefit from the current stability through responsible pricing,” he said.

Also, to arrest further depreciation of the Zimbabwean dollar, the government has taken steps to review its procurement approach to minimise the practice of forward exchange rate pricing that was being pursued by its suppliers of goods and services.

Mangudya is also upbeat about the monthly inflation outlook, noting that the policy measures they have announced so far have begun to tame inflation.

“As a result of the measures, month-on-month inflation, which had increased to 30.7 percent in June 2022, decelerated to 25.6 percent in July 2022. The exchange rate has also largely stabilised during the month of July 2022 following the implementation of the tight monetary policy measures,” he said.

Finance Minister Mthuli Ncube said the fiscal side was working very hard to curb speculative activities.

“There is a lot that we are doing and we have made sure that either we are tackling domestic factors or acting on external factors and those together have gone a long way in stabilising inflation and the exchange rate,” he said. –Xinhua




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