New gold-backed currency starts circulation in Zimbabwe

• Zimbabwe is phasing out ZWL as it ushers new gold-backed currency ZiG, starting today, Monday, 8 April, 2024.
• The ZiG is said to be anchored by 2.5 tonnes of gold held 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 into everyday use.

Zimbabwe launched a new currency on Friday, 5 April, 2024, called the Zimbabwe Gold or the ZiG in short. The launch of the new currency took place 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 a raft of measures and interventions 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 to 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 per cent and 90 per cent of transactions in an economy that is largely informal with most transactions taking place either outside formal channels or in cash. The ZWL, however, remained the official currency.

The ZiG is said to be anchored by 2.5 tonnes of gold held 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 had to spend 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 either their banks or insurance company or mobile money operator 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 and 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 normal.

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

Right off the bat the former banker declared that Government will not print money under his watch (he mentioned this phrase repeatedly during the presentation). He said that quasi-fiscal activities have been moved to 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 provided by 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 below market prices, thus providing an implicit price subsidy. If not clearly included in the government’s financial reports, quasi-fiscal activities are a particular 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 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 could be undertaken by the fiscal authority via expenditures, subsidies, or taxes.

That the Governor began his MPS by making this very bold proclamation should reassure the market and its participants however, it has been received with skepticism. 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. Normally the MPS is presented by the Governor during the first week of February and his mid-term MPS is presented around the same time in August.

Sources say that the delay in publishing of the MPS was due to preparations for the launch of the new structured currency. The country’s president Emmerson Mnangagwa had announced earlier in the year that there would a new structured currency which 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 the introduction of the ZiG would mean expropriation of 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 said 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 the 5^th of April.

ZWL notes exit as gold-backed currency ZiG rolls out

Banks, with immediate effect 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 stakeholder 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 strong 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 are required to 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. FX for imports, as of the announcement of the MPS 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 that they 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 be entertaining any requests for exemptions. In his own words, he said, “it aint 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.

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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 Open Market Operations (OMO) will be conducted by the central bank to ensure that the stock of money in circulation is always equal to the composite basket of minerals and currencies.

This statement raised a question from one of the journalists present in the press statement to the effect that Zimbabwe had gone back to the gold standard. The Governor reiterated that Zimbabwe had introduced a structured currency and not adopted the gold standard.

The difference to the lay person between the two monetary systems is that the gold standard is a monetary system where the value of a currency was pegged to actual gold bullion held as reserves in that country’s central bank whereas a structured currency is backed by not only some precious metal which can include gold but also 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.