New gold-backed currency starts circulation in Zimbabwe.

• Zimbabwe is phasing out ZWL as it ushers a new gold-backed currency, ZiG, starting today, Monday, 8 April 2024.
• The ZiG is anchored by 2.5 tonnes of gold in the central bank’s vault and a basket of foreign currencies held as reserves.
• Zimbabwe’s new Central Bank Governor has announced sweeping reforms as the new currency enters everyday use.

Zimbabwe launched a new currency on Friday, 5 April 2024, called the Zimbabwe Gold or the ZiG. The launch of the new currency occurred during the announcement of the country’s latest Monetary Policy Statement (MPS) in an event presided over by newly appointed central bank governor John Mushayavanhu.

The MPS introduced measures and interventions to anchor the local currency and ensure exchange rate and price stability. The old currency, the ZWL, had depreciated to its lowest against the US dollar, roughly ZWL 32,000. It lost over 90 per cent of its value against the greenback. Since 2020, Zimbabwe has operated a multi-currency system.

The US dollar accounts for between 80 and 90 per cent of transactions in an economy that is mainly informal, with most transactions taking place outside formal channels or in cash. The ZWL, however, remained the official currency.

The ZiG is anchored by 2.5 tonnes of gold in the central bank’s vault and a basket of foreign currencies held as reserves.

New gold-backed currency rolls out today, Monday, 8 April, 2024

The announcement of phasing out ZWL, together with a directive to operationalize the new currency by Monday, 8 April 2024, has had players in the economy jostling to comply with the central bank’s pronouncement.

Banks, mobile money operators, payment system providers, financial services companies, and retailers have spent the weekend recalibrating their internal financial systems to accommodate the new currency.

This development resulted in a temporary halt in transactions in the old currency. Consumers have seen SMS notifications on their mobile devices from their banks’ insurance companies or mobile money operators informing them that ZWL transactability had been temporarily halted.

There have been reports some informal retailers have also been rejecting ZWL cash payments for goods and services. In somewhat of an irony, the SMS messages that consumers would have received from Friday informing them of the transition to a new currency would also mention that US dollar transactions and related channels remain operational and function as usual.

In his maiden MPS, John Mushayavanhu, a former banker (previously chief executive of FBC Holdings, an indigenous bank holding and financial services company), spoke powerfully about the measures and policy that will characterize his tenure as Governor of the apex bank.

The former banker immediately declared that the government would not print money under his watch (he mentioned this phrase repeatedly during the presentation). He said quasi-fiscal activities have been moved to the treasury, away from the central bank.

A textbook definition of quasi-fiscal activities would be “…activities undertaken by state-owned banks and enterprises, and sometimes by private sector companies at the direction of the government, where the prices charged are less than usual or less than the “market rate.”

Examples include subsidized bank loans from the central bank or other government-owned banks and noncommercial public services provided by state-owned enterprises. A typical example would be state-owned enterprises providing fuel, electricity, or water at market prices below the market price, thus providing an implicit price subsidy. If not included in the government’s financial reports, quasi-fiscal activities are a type of extra-budgetary transaction.”

Zimbabwe’s collapsing economy

In Zimbabwe’s specific case, these activities were made necessary by the dwindling tax base due to a collapsing economy and the inability to increase borrowing from abroad. The regime relies on the RBZ to generate money supply to fund quasi-fiscal activities (QFAs), essentially a central bank activity that the fiscal authority could undertake via expenditures, subsidies, or taxes.

The Governor began his MPS by making this bold proclamation to reassure the market and its participants; however, it has been received with scepticism. This is because of Zimbabwe’s long history of printing money. This is according to research by Sonia Munoz from the Industrial University of Santander on “Central Bank Quasi-Fiscal Losses and High Inflation in Zimbabwe”. The MPS that was presented on Friday was delayed. Typically, the Governor presents the MPS during the first week of February, and his mid-term MPS is offered around the same time in August.

Sources say that the delay in publishing the MPS was due to preparations for launching the new structured currency. The country’s president, Emmerson Mnangagwa, had announced earlier that a new structured currency would be introduced.

This proclamation by the president resulted in widespread consternation in the market as players were uncertain about what the implications of the ZiG would mean for them and their business activities. Zimbabwe, as stated earlier, operates a multi-currency system.

The Governor allayed market fears that introducing the ZiG would mean expropriating US dollar balances held by households and firms. Mushayavanhu said that there would be no conversion of FX balances to ZiG. FX balances will remain as is. The Governor noted that ZWL balances would be converted to ZiG at a predetermined rate. The MPS indicated that this conversion rate will be the prevailing exchange rate on 5 April.

ZWL notes exit as gold-backed currency ZiG rolls out

With immediate effect, banks have been directed to rename all accounts, styling them as ZiG accounts and not ZWL. The central bank has given the public a window of 21 days to deposit bank notes in ZWL, after which these notes will be completely phased out. The rationale for this window, the Governor told stakeholders, was to allow those members of the public who do not have bank accounts to return bank notes and preserve their value.

In terms of FX retentions, the Governor sounded a firm tone. These retentions would remain standardized at 75 per cent to 25 per cent. In Zimbabwe, for every US$ 1 generated as export earnings, companies must surrender US$ .25 to the central bank.

These retentions are what presumably the central bank will use to finance imports through what the Governor said will take the place of the RBZ FX auction. As of the announcement of the MPS, FX for imports will be made available to importers on a willing buyer, willing seller basis.

The outgoing Governor, John Mangudya, had previously granted dispensations for exporters to retain all their export proceeds provided they had external loan obligations to service or had ringfenced their export earnings as collateral for external long-term financing structures.

The new Governor stated that retentions are to remain standard and that he will not entertain any requests for exemptions. In his own words, he said, “It ain’t gonna happen”. The reason for his position is that Zimbabwe is short of FX, and it is implausible that certain exporters would want to retain all their export proceeds.

Read also: US Sanctions on Zimbabwe: New Directives Set to squeeze top leadership.

Reforms: Zimbabwe’s Central Bank cuts interest rates

Interest rates have also been cut from 130 per cent per annum to 20 per cent per annum. To this end, the Governor also said that the central bank will conduct Open Market Operations (OMO) to ensure that the stock of money in circulation always equals the composite basket of minerals and currencies.

This statement raised a question from one of the journalists in the press about Zimbabwe’s returning to the gold standard. The Governor reiterated that Zimbabwe had introduced a structured currency without adopting the gold standard.

The difference between the layperson and the two monetary systems is that the gold standard is a monetary system where the value of a currency is pegged to actual gold bullion held as reserves in that country’s central bank. In contrast, a structured currency is backed by some precious metal that can include gold and a basket of currencies.

The Governor has shaken things up at the central bank and the economy. The effectiveness of his policies and reforms will be a matter of interest to business and the public.