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Feasibility of a gold-backed currency


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Feasibility of a gold-backed currency

2 DAYS AGO

Persistence Gwanyanya
IN my February 10 instalment, I argued that using gold to back bond notes could boost confidence in the surrogate currency and, by extension, attract more investments to rebuild the local economy.

Admittedly, this suggestion does not constitute an optimal currency solution, but could be a better option to avoid a currency crisis.

It’s now clear that, in their current form, bond notes and coins would be inadequate to effectively boost exports as well as remedy externalisation.

Thus, there may be need for measures to beef up the current currency regime and build on the progress made so far to avoid a deeper economic crisis.

Suffice to say my proposal is not advocating for the return of the heyday gold standard that operated at the end of the 19th and early 20th century.

This currency regime operated well as a remedy to the inflation scourge and currency depreciation attributable to excessive credit creation and, as such, might not produce the best result in the current deflationary environment, where monetary authorities have limited control over money supply.

An effective currency solution should be rooted in the clear understanding of the country’s currency crisis.

As noted earlier, the cash shortages in Zimbabwe are largely a result of an unbalanced economy characterised by high levels of consumption – funded from imports – and low production.

This economic imbalance, in part, can be attributed to the fixed exchange rate regime with the dollar, which is about 25 percent overvalued. This makes Zimbabwe’s exports uncompetitive in the international market.

However, adopting a gold-backed currency, which entails switching the peg from dollar to gold, may not necessarily improve the country’s competitiveness.

Clearly, the lack of competitiveness can be traced to deep-seated structural challenges such as poor infrastructure deficit, high cost of utilities, scarcity and high cost of capital.

Zimbabwe’s experience with the fixed exchange rate is deflation, rising unemployment and poverty, sluggish growth and budget and trade deficits.

There is no guarantee that these challenges would be addressed by just switching from dollar to gold peg.

Importantly, being a tiny US$14 billion open economy in a more than $80 trillion world, Zimbabwe might not be better placed to lead the gold monetisation of its currency.

The suggestion to gold back the bond currency alone would be difficult to achieve since this currency is interchangeable with the US dollars at a stipulated exchange rate.

If bond notes were to be revalued against gold, it would automatically mean that the rest of the country’s money supply would also have to be valued similarly.

This would be very difficult to achieve given the current and potential production levels of gold, including financial challenges plaguing the economy.

Devoting the country’s full annual production of yellow metal to build the required reserves will not even be enough to support US$6,7 billion in money supply in the economy.

At a price of ZW$40 000 per kg (35 274 ounces),it would take not less than five years to build the 167 tonnes of gold reserves required to back the full money supply in Zimbabwe, assuming potential annual production of 30 tonnes.

The biggest dilemma that the country faces by devoting all its gold production towards building gold reserves is that this would lead to a further deterioration of the balance of payment position.

Annual exports would fall by $1billion to around $2billion as gold exports are redirected towards building reserves.

This would worsen the liquidity and cash crisis, which may lead to the abandonment of the home-grown gold standard before it starts.

The only better alternative is for authorities to completely abandon the current multiple currency regime and make bond notes a different currency from the other multiple currencies.

This would mean that there would be US$300 million of gold-backed bond notes ($200 million) and coins ($50 million), and this currency would be used for domestic transactions only.

This constitutes de-dollarisation, but it would be difficult to achieve in a short space of time.

As such, the gold-backed bond currency would be allowed to initially circulate alongside the multiple currencies, predominantly US dollars, which mean the US dollar value of gold, which varies minute to minute on the international market, would not be the same as bond notes valuation of gold.

Far from ensuring stability, the proposed currency peg would give rise to enormous complexities as well as volatility and unpredictability.

When Zimbabwe dollarized, the price of gold per ounce was US$869, and thereafter rose to US$1664 before falling to US$1 225 per ounce in 2017.

Had the currency been pegged to a fixed amount of gold, its value would have increased over 90 percent and then dropped 26 percent.

That means its value would have risen 40 percent between 2008 and 2017, which is not much different from the extent of Zimbabwe’s currency overvaluation since dollarisation.

This also underscores the assertion that a country’s competitive challenges would not be solved by just switching from US dollar peg to a gold peg.

It is arguable that the current currency regime is facing a number of challenges that are threatening its sustenance.

The cash premium relative to RTGS money, together with the reported bond note discounts and the return of the Old Mutual Implied rate discount of around 25 percent since September 2016, is instructive.

The dollar in RTGS balances or in bond notes or in fungible Old Mutual shares is not the same as cash dollar or US dollar outside Zimbabwe.

This is a major hinderance to capital flows in Zimbabwe, which are expected to continue as Nostro funding challenges continue.

This suggests that an effective currency solution in Zimbabwe should address production challenges and capital flight.

With an estimated US$14 billion to US$20 billion required to close the infrastructure deficit and US$5 billion needed to reindustrialise, there is need to generate and boost confidence in the country’s currency so as to attract meaningful investments.

This could be the sole reason that gave rise to the idea of monetising bond notes with gold.

The challenges to monetise the country’s money supply through gold doesn’t render the idea impracticable.

There may be need to consider monetising a portion of the money supply in the economy, say a tenth.

This would go a long way in improving confidence.

The writer acknowledges the contributions of Professor Anthony Hawkins in this article. Persistence Gwanyanya is an economist and banker. He heads the financial advisor portfolio of Zimbabwe Business and Arts Hub (ZBAH), He is also a member of the Zimbabwe Economics Society who writes in his personal capacity. You can e-mail your feedback on percygwa@gmail.com, Whatsapp on +263 773 030 691 or bog on percyconadvisory.com.

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  • 2 months later...

http://allafrica.com/stories/201704280863.html........

27 APRIL 2017

Zimbabwe: Government Admits 'Printing' Money

By Phillimon Mhlanga

PRESIDENT Robert Mugabe's embattled administration has for the first time admitted printing money in the form of a virtual currency through the Real Time Gross Settlement (RTGS), acknowledging ((( this cannot be backed by United States dollar bank notes imported by local banks,)))) the Financial Gazette's Companies & Markets (C&M) can report.

Finance and Economic Development Minister, Patrick Chinamasa, made the disclosures in Parliament. He said: "Government funds its employees' salary accounts through electronic transfers over the Real Time Gross Settlement platform. On the contrary, employees would want to obtain physical cash from the banks. This misalignment is the greatest cause of queues at banks for cash as both the Reserve Bank of Zimbabwe (RBZ) and banks would be required to withdraw foreign exchange from their nostro accounts to meet local cash demand."

Nostro accounts are accounts held by local banks with offshore financial institutions. They are used predominantly to settle international obligations, including import of goods. Banks have used their nostro accounts to import US dollar bank notes but these have always been used to support real US dollar bank balances for local deposits.

Government had always been denying that it has been creating or printing its own money to pay wages and salaries for its strong workforce of more than 300 000. The salary bill is gobbling more than 90 percent of revenue, leaving very little for infrastructure development.

((((((The printing of money through the RTGS platform can only be backed by local currency, rather than foreign currency ))))))which has to be earned through exports of other foreign currency receipts. It would therefore appear the introduction of bond notes, despite public protestations, was meant primarily to fund the virtual currency, which has been described by some analysts as phantom money.

The reason for government resorting to creation of money in the domestic economy has largely been its huge budget deficits, which it started incurring following the collapse of the inclusive government in 2013.

During the inclusive government, then finance minister, Tendai Biti, insisted that government would only spend what it collected in the form of revenue under his famous "we eat what we gather" policy.

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http://spotlight-z.com/news/bond-notes-precursor-new-zimbabwe-gold-backed-currency/..........

 
Spotlight Zimbabwe
 
05-06-16 by Spotlight Zimbabwe

Bond Notes Precursor to new Zimbabwe Gold-backed Currency

Gold-Currency-4-660x420.jpg

Mary-Kate Kahari

HARARE-The shock announcement by government this week, to introduce so-called bond notes in 2 months time to the tune of $200 million, as a stop gap measure to decelerate the current cash crisis, is just but a precursor of smuggling back a new gold-backed Zimbabwe currency very soon, Spotlight Zimbabwe has heard.

Intelligence sources also disclosed last night, that the move is reportedly a pre-emptive contingency plan by the secret service to stem possible civil unrest, amid growing fears of cash riots by President Robert Mugabe’s regime.

Zimbabweans staged riots triggered by a wave of price escalations and extortionate taxes in 1998. At least 10 people were killed during the demonstrations which saw the army deploying tanks on the streets.

Central bank boss, John Mangudya, on Wednesday announced broad-based measures to ease the green-back supply strain, which has resulted in some ATMs around the country running dry.

To stem the outflow of US dollars, the Reserve Bank of Zimbabwe will limit daily withdrawals to $1,000, 1,000 Euro ($1,140) or 20,000 South African rand ($1,340), according to Mangudya.

The RBZ chief, also announced that 40% of dollar receipts from exports will be converted into the South African rand and 10% into the Euro. The bank also suggested the public use debit and credit cards or mobile phone systems for payments.

“The Zimbabwe Bond Notes of denominations of $2, $5, $10 and $20 shall, therefore be introduced in future, as extension of the current family of bond coins for ease portability in view of size of the USD200 million backed facility. The facility shall also be used to discount trade related paper in order to provide liquidity for business trading operations,” said Mangudya

 
Spotlight Zimbabwe, formerly The Telescope News, was first to break news of the mysterious gold-backed currency on 19 December 2014.

 
Below we reproduce the full article verbatim:

President Robert Mugabe’s administration, is reportedly sittings on wads of a new Zimbabwe currency to be backed by a gold standard, which can be issued at a moment’s notice as a home grown panacea to manage a dwindling economy.

The idea for the gold-backed currency was first discussed in private, between Mugabe and fallen Libyan leader Muammar Gaddafi, on the side-lines of the inauguration of South African leader Jacob Zuma, in Pretoria in 2009, according to senior government officials.

Gaddafi wanted a common gold currency for the whole African continent, while Mugabe had proposed that it was better for the African Union (AU) member states to introduce the gold standard money individually, before announcing one common currency at a later stage so as to throw international financial players into confusion.

Disclosures of the top secret, come at a time when finance minister, Patrick Chinamasa has been defending the country’s use of a multi-currency regime since 2008, as a tactical strategy to contain “the enemy” because he cannot “devalue his own currency”.

Harare officially uses a currency basket, which includes: The Botswana pula, the British pound, the euro, the South African rand and the US dollar as the citizenry monetary options, following the collapse of the Zimbabwe dollar due to mismanagement of the economy by Zanu PF. Early this year the RBZ added four new currencies, as legal tender namely: the Australian dollar, the Chinese yuan, the Indian rupee and the Japanese yen.

Dispite concerns that introduction of the new currency alone, without addressing the supply side of the economy, characterised by company closures, will fuel a new wave of inflation, Mugabe appears determined to rid the country of what his backers are calling “Western monetary imperialism”.

This reporter, wrote about Zanu PF’s threats to return the local dollar last year in a London based online publication, whose report brought to light Mugabe’s intention to railroad a new currency as early as June 2015.

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