RESERVE Bank Governor Gideon Gono’s (pictured with Tendai Biti Zimbabwe finance minister) proposal this week for the introduction
of a gold-backed Zimbabwe dollar is an idea whose time has come. If
implemented properly, the gold-backed local currency will resolve the
liquidity crisis currently ravaging the sanctions-hit economy.
In light of the global financial crisis and sanctions, Zimbabwe is
effectively barred from accessing any meaningful lines of credit and the
liquidity crisis will persist if the domestic capital market is not
re-activated with the introduction of a local currency backed by a precious
There is no shortage of reasons for the collapse of the Zimbabwe dollar, but
it is now universally agreed that quasi-fiscal activities by the central
bank and excessive printing of money accelerated the demise of the local
But the country has started to generate meaningful revenues with the
Zimbabwe Revenue Authority regularly surpassing revenue collection targets.
Previously, the government had been forced to print money to finance
everything. This is no longer necessary given the economic recovery and the
discovery of diamonds.
The revenue from diamonds can be used to build the six months import cover
and stock up gold reserves to support the Zimbabwe dollar as proposed by the
The gold-backed currency is anchored on the premise that the central bank
holds a large amount of gold (or other precious metal) in relation to the
paper money that they issue. That means if the country doesn’t have any gold
reserves, no money can be issued.
This effectively eliminates the normal inflationary pressure that comes from
a fiat money system referring to money that has value only because of
government regulation or law.
Zimbabwe has systematically been excluded from the international credit
system, specifically because of the Zimbabwe Democracy and Economic Recovery
Act (Zidera) passed by the United States in 2001. The Act makes it illegal
for any US national or entity to transact with certain companies or
individuals in Zimbabwe.
This affects various institutions such as the World Bank, IMF, International
Finance Corporation and African Development Bank where US representatives
cannot vote in favour of any credit to Zimbabwe. This creates a huge
political risk premium which makes international banks hesitant to grant
lines of credit to Zimbabwe and Zimbabwean institutions.
This situation effectively blocks these institutions from doing any
meaningful business with Zimbabwe as the country’s political risk is
magnified. This lack of access to international credit markets has become
very clear throughout the economy with banks failing to grant any medium to
long-term loans. This is partly causing the mini-financial crisis rocking
Zimbabwe’s banks as they fail to access reasonably-priced funding.
It is widely-reported that banks are lending at 40 to 60% per annum which is
way too high an interest rate to give to a legitimate business transaction.
This has created a very high default risk and forced banks to avoid lending.
This illiquidity needs to be addressed through the introduction of a
A modern currency is basically paper money backed by the country’s revenue
generation capacity and assets.
The United States is the largest holder of gold reserves. How much of this
is still in Fort Knox physically and not just on paper is another question
as much gold is loaned out. In essence, the US has sold a lot of its gold
into the market through gold leasing even though it still shows up on the
federal reserve’s books as an asset (accounts receivable).
This partly explains why the US dollar is still the world’s reserve currency
since the US holds the largest amounts of gold even though its exact
quantity remains a subject of speculation.
In foreign exchange, no major currency is considered to be as safe and
stable as the Swiss Franc. The country’s centuries-long policy of political
neutrality, as well as the fact that 40% of its currency reserves were
previously backed by the precious metal, contribute to the Swiss’s image as
“liquid gold”. The proposed gold-backed Zimbabwe dollar can in fact be based
on the same model.
Canada and Australia possess large reserves of precious metals and both
countries have very strong, well-developed mining sectors. Australia is the
world’s third largest exporter of gold with mining accounting directly for
approximately 8,5% of its GDP. Canada is the world’s third largest producer
These two countries have strong economies and currencies. Whilst Zimbabwe
has huge gold and other mineral reserves, these have been properly leveraged
out to create liquidity in the country’s economy. There is need for Zimbabwe
to move away from total dependency on a foreign currency whose economy has
nothing in common with Zimbabwe’s.
The economy and industry is currently reportedly operating at approximately
45-50% capacity. This is significantly higher than the 10-20% capacity
utilisation before the introduction of multiple currencies in 2009. Now the
multiple currencies have achieved their intended purpose which was to
stabilise the economy.
The next phase, which is growth, requires the use of
a softer currency which closely mirrors the country’s macro and micro
economic conditions and the US dollar can be used in its traditional sense
as a foreign currency but not to permanently replace the Zimbabwe dollar.
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