Sixth time’s a charm - Zimbabwean Gold (ZiG)

Unfortunately, African nation of Zimbabwe can’t be perceived as greatest example of financial stability. It is just the opposite – it became a living symbol of modern-day hyperinflation. But could its issues be fixed with newest version of Zimbabwe Dollar? This time backed with gold and FX currencies basket.

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Brief look onto six instalments of Zimbabwean dollar

Had anyone use words ‘Zimbabwe’ and ‘financial stability’ in one sentence, this would resemble cruel joke. Especially if we realise that about 15 years ago its currency was somewhat a symbol of modern hyperinflation that in its peak reached 89.7 sextillion (twenty-one zeroes!) percent, with infamous 100 tln Zimbabwean Dollar note as its sad symbol.

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Poor economic conditions, instability and other factors, caused value of ZWD to deteriorate significantly. By 2006 one Pound Sterling was worthy 1 mln ZWD (1 Polish Zloty was at a time 5.47-6.00 GBP). Then in attempt to cure situation Reserve Bank of Zimbabwe stepped in and started re-denominations - 1000 ZWD became worthy 1 new ZWN. Then 10 bln ZWN had been denominated to 1 ZWR. Then 1 trl ZWR was to be changed to 1 ZWL. All of that happened between 2006-2009 and effectively marked death of Zimbabwe Dollar, which eventually has been ‘suspended’. In response to hyperinflation, government permitted wide usage of foreign currencies, and soon it was nothing unusual to see i.e. US Dollars, Pound Sterling, South African Rands and even Chinese Yuan or Indian Rupee to be used for payments everywhere. In somehow ‘Austrian school’ approach, merchants, users, buyers and sellers established streetwise exchange rates and pricings, which led to ‘normalisation’ in form of softening inflationary pressures.

In 2015 Reserve Bank of Zimbabwe began process of demonetisation of ZWL (Zimbabwe Dollar) and made official exchange course at 35 quadrillion ZWL for 1 USD. Ironically years later, then discontinued Zimbabwean Dollar eventually reached some level of appreciation. It became worldwide recognisable symbol of modern-day hyperinflation and became popular as collectible, gift and symbol of cash depreciation in time. Even ended up being sold on internet auctions at a price sometimes vastly exceeding its value and value of paper it has been imprinted on.

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Poor economic conditions, instability and other factors, caused value of ZWD to deteriorate significantly. By 2006 one Pound Sterling was worthy 1 mln ZWD (1 Polish Zloty was at a time 5.47-6.00 GBP). Then in attempt to cure situation Reserve Bank of Zimbabwe stepped in and started re-denominations - 1000 ZWD became worthy 1 new ZWN. Then 10 bln ZWN had been denominated to 1 ZWR. Then 1 trl ZWR was to be changed to 1 ZWL. All of that happened between 2006-2009 and effectively marked death of Zimbabwe Dollar, which eventually has been ‘suspended’. In response to hyperinflation, government permitted wide usage of foreign currencies, and soon it was nothing unusual to see i.e. US Dollars, Pound Sterling, South African Rands and even Chinese Yuan or Indian Rupee to be used for payments everywhere. In somehow ‘Austrian school’ approach, merchants, users, buyers and sellers established streetwise exchange rates and pricings, which led to ‘normalisation’ in form of softening inflationary pressures.

In 2015 Reserve Bank of Zimbabwe began process of demonetisation of ZWL (Zimbabwe Dollar) and made official exchange course at 35 quadrillion ZWL for 1 USD. Ironically years later, then discontinued Zimbabwean Dollar eventually reached some level of appreciation. It became worldwide recognisable symbol of modern-day hyperinflation and became popular as collectible, gift and symbol of cash depreciation in time. Even ended up being sold on internet auctions at a price sometimes vastly exceeding its value and value of paper it has been imprinted on.

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But then, in 2019, Zimbabwe attempted to reinstate control by introducing new Zimbabwean dollar (again ZWL), introduced ban for use of foreign currencies, and again began ‘printing’. This once again in fast pace destroyed any re-established confidence, destabilised economy, and yet again fuelled inflation. And yet again, Zimbabwe had to allow usage of foreign currencies such as US world famous greenback in attempt to stabilise economy.

In a most recent development to cure situation – maybe even desperate - in April 2024 Zimbabwe launched new currency – ZiG (Zimbabwean Gold) - to replace its previous one – ZWL - that in recent months has been battered by depreciation, and rejection by the population, tired of long term fiscal incompetence of authorities. Since January to beginning of April 2024, old currency – ZWL - lost over 70% of its value on official market, and was plunging even further on the thriving, illegal black market. Inflation increased from 26.5% in December last year to 34.8% this January 2024 before spiking to 55.3% in March, according to official figures.

And this is where ZiG is being introduced. Authorities hope new measures will halt an ongoing currency crisis. And it wouldn’t be anything interesting on a subject, if not a fact, ZiG will be anchored on gold reserves and a basket of foreign currencies. Considering that responsible for Zimbabwean legal tender are credited with zero creditability (both by international financière and Zimbabweans), country has not been assigned with credit rating by any of the eight rating agencies and generally is perceived as in between non-investment speculative and extremely speculative… let’s just say, there are lot of doubts about survivability of ZiG in time. Although it already marked minor success, as upon introduction, it stabilised for now against FX. It’s just… by decision of local authorities, ZiG is non-convertible on FX markets… hence in closed loop circulation. Ergo, it’s value is not effect of supply/demand on FX markets, but assumptions of central bank and supporting basket.

‘Thou shall be perceived worthy’

ZiG has been introduced electronically in April 2024. On that time, Zimbabwe’s commercial banks were required to convert all existing ZWL balances into the new ZiG currency. As of that date, ZiG became Zimbabwe’s legal tender, alongside many foreign currencies, as stated before. Since May people are now able to use new banknotes and coins. But ZiG appears to follow path of mistrust, with even some government departments refusing to accept it / being allowed not to accept it yet.

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As for now, there is lot of hesitation in the country, with even sellers or service providers refusing to accept ZiG, and still favour US dollar. Same with majority of petrol stations, that continue to display prices in US dollars. Similar happens at government passports offices and at government departments which have pegged some taxes to be denominated exclusively in US dollars. Due to its physical unavailability, ZiG is yet to be accepted by most informal shops and vendors. At the same time, other businesses are being ordered to use ZiG exclusively, and face punishment if they don’t. It is being reported that certain bank accounts were frozen, as entities owing them were accused by government of rejecting the new currency. And the government has announced fines up to 200k ZiG or about 15k USD, for businesses that fail to stick to official exchange rate. Government of President Emmerson Mnangagwa (one of Mugabe’s subordinates, Minister of Defence responsible for genocidal massacres, former gang member, responsible a ta time for internal Security forces, who eventually overturned aged dictator, became authoritarian president and still has to be perceived as improvement, simply for being more… pragmatic… as per local standards) has taken a hard-line approach — dozens of black market currency dealers were arrested and have been in pre-trial detention for weeks, accused of trying to undermine new currency. These are considered as serious charges that carry a maximum prison term of 10 years. But this came in response for the fact, that In the first two weeks after ZiG’s launch, it lost nearly 50% of its value on the black market, falling from 13.56 ZiG for 1 USD to peak at approx. 17-20 ZiG.

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As for now it is simply US dollar remaining as most favourite among ordinary Zimbabweans even despite spirited efforts by central bank to advertise new currency. It is estimated “greenback” accounted for 85% of transactions, as per period preceding introduction of ZiG, and is being used for basically everything - from paying rent, school fees to buying groceries. Many inhabitants even decide to take their earnings in local currency straight to the black market to exchange for dollars, since banks don’t give out USD. However since then, as per mid-July data, USD / ZiG share of usage changed to approx. 80/20%.

What we clearly see from above description, fits definition of fiduciary money. It is money that is accepted as a medium of exchange due to the trust that exists between payer and payee. That is also part of the social contract bound between authorities and inhabitants of land. By definition, fiduciary monetary system refers to a monetary system in which the government issues a currency to the public, and value of the money is based on the public’s trust that the money represents. Hence, we decide to exchange goods and services for said money and otherwise. Of course, definition doesn’t take under consideration advanced transactions made on FX markets and debt auctions. However, we would like to focus on main principle here – for currency to be perceived usable, it must be trusted. Otherwise, no decree nor administrative measures will force people to embrace it forcefully, especially after at least sixteen years of financial chaos, during which country experienced hyperinflation and six denominations. Therefore, always will be significant number of users leaning towards gold, US dollar, and other foreign currencies, due to a mistrust over authorities. We perceived such scenario way too many times in history already, and even studied in detail one such, on example of Polish Zloty under rules of communist regime. Interested in subject we kindly invite to read our past analysis ‘Everything you'd like to know about gold in Poland, but are afraid to ask, part 4’.

Such actions simply require time and stability. It is government’s prime role to provide such (including price stability) and conditions enabling wealth building to its people. But events occurring in just last few decades proved, that Zimbabwe failed to learn this lesson and distrust to government’s ideas and implementations is justified. Especially since last edition of fiat Zimbabwe Dollar caused yet another spike of inflation, which occurred just few months ago. For now, authorities will use police force to crack dishonest currency dealers, legislature and financial penalties to force companies to useZiG and already started campaign promoting ZiG across the country.

And so, ZiG implementation will be bumpy road, even despite of its certain uniqueness. For now it even received locally nickname of ‘first policed currency in the world’.

Remarks on ZiG’s composite basket

Let’s study on how gold content and FX basket used to secure ZiG looks like. As per Zimbabwean legislation, ‘Statutory Instrument 60 of 2024’:

‘The Reserve Bank shall only issue ZiG notes and coins against reserves assets actually held and managed by it, and the value of the ZiG issued and in circulation at any one time shall be anchored in and backed or covered by a composite basket of foreign currency reserves and precious metals received (mainly gold) and valuable minerals, held and maintained by the Reserve Bank in its vaults as part of the in-kind royalties’.

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Under the rules, Reserve Bank of Zimbabwe committed itself to issue new ZiG only against the value of reserve assets which it holds. As of 5 April 2024, it has reserve assets of 100 mln USD in cash and 2,522 kg of gold (at a time at 185 mln USD), of which 793 kg had been purchased in February 2024. As for mid-June, they are at 370 mln USD. Where the drastic increase came from? We’ll explain later.

Issuance of 2.6 trl ZiG required full cover of gold and cash reserves amounting to 90 mln USD. But even if count whole 285 mln USD, that’s just equivalent of less than 2 weeks’ Zimbabwe’s imports, hence not sufficient to cover full market needs at this moment. Gold and cash reserve holdings remain currently with the Bank, hence, in theory, Reserve Bank of Zimbabwe is capable to approx. triple issued amount of ZiGs. Said assets are to be subject of independent audit, performed by appointed external auditors. Results of such are to be published in Annual Report of the Reserve Bank, hence Reserve Bank of Zimbabwe commits itself to preserving full transparency.

Yet no convertibility is expected, so ZiG owners won’t be able to claim exchange for components of backing up basket. On occasion of ZiG introduction, Reserve Bank of Zimbabwe also stopped supporting its previous gold related programmes, which were issuance of gold coins (as alternative store of value) and gold backed digital tokens, which also been named ZiG – both introduced earlier in 2023. Digital and physical ZiG shared similar traits – both were backed by basket which included gold.

According to local central bank, new structured currency is anticipated to restore confidence in local currency and hence safeguard the multi-currency system, which when implemented and maintained, supported stability.

At a time of issuance, ZiG has been backed up by composite basket:

‘The value of one ZiG on the date of its initial issuance shall be equivalent to the value of one milligram of gold of ninety-nine per centum purity as determined by the spot price of gold, and the prevailing interbank foreign exchange rate. Thereafter it shall be determined by the inflation differential between ZiG and the United States dollar inflation rates and the movement in the price of the basket of precious metals (mainly gold) and valuable minerals held as reserves by the Reserve Bank’.

Foreign currency balances are to be accumulated through market purchases from the 25% surrender requirements as well as the sale of some precious metals received as royalties. Hence, that is one of the reasons, why administration prefers payments to be made in US dollars. With regards to gold, we’re going to focus on the subject in next chapter.

It seems, this would make ZiG pretty much tied up to the price of gold. At a time of electronic grand premiere, 1 gram of gold stood at 74.91 USD, hence 1 milligram would be at 0.07491 USD. With ZWL/USD rate at approx. 30.5k ZWL for 1 US dollar, this would result in conversion rate of (0.07491 * 0.99 * 30.5k) = 2262, which is near the rate the bank used at a time. Now, with 1 ZiG at 0.0741609 g. of gold, that meant one US dollar equals 13.48 ZiG. This is very near the ZiG 13.56 per US dollar. Since May, USD/ZiG official exchange rate remains in between 1:13.57-14.02. Considering how previous Zimbabwean currency depreciated against USD between January – March (from 1:2 to 1:12), this could be considered as a short-term stabilisation.

Also what’s interesting, is opinion of International Monetary Fund on development occurred. This is from end of June:

‘Despite headwinds, Zimbabwe’s economy continues showing resilience. Growth is expected to decelerate to about 2 percent in 2024 (from 5.3 percent in 2023), as the country faces a devastating El Niño-induced drought. Higher import bills are also worsening the balance-of-payments outlook. But growth is expected to recover strongly in 2025 to about 6 percent, supported by a rebound in agriculture and ongoing capital projects in manufacturing.

Against this background, the Reserve Bank of Zimbabwe (RBZ) introduced in April 2024 a new currency—the Zimbabwe Gold (ZiG). The ZiG official exchange rate has so far remained stable, ending a bout of macroeconomic instability in the first 3 months of the year (when the Zimbabwean dollar depreciated by about 260 percent). Assuming that macro-stabilization is sustained, cumulative inflation in the remainder of the year is projected at about 7 percent.

The mission welcomes improvement in monetary policy discipline and recommends further refinements to the policy framework. Price stability would be best achieved by stabilizing the ZiG nominal exchange rate against a suitable basket of currencies (accounting for the dominant role of the USD in the economy). This could be in turn accomplished by controlling base money growth: for now through unremunerated Non-Negotiable Certificates of Deposits (NNCDs), but over time through indirect (interest-rate-based) monetary instruments to increase the attractiveness of the new currency. The exchange rate should be determined in a deeper market to provide relevant information in the decision regarding the monetary policy stance, which would require identifying and removing any remaining impediments to the functioning of the FX market to promote price discovery.’

Where to source gold from to finance ZiG?

Few paragraphs above we mentioned on Zimbabwe gold holdings. As of 5 April 2024, reserve assets are at 100 mln USD in cash and 2,522 kg of gold (approx. 185 mln USD). That’s just a mere shadow of what former Rhodesian government had stored and what had been squandered over the years. However by half of July 2024 they increased by nearly 100 mln USD. Reason for that lies in taxation and mining royalties in form of output share. This has been introduced in 2022, and effectively allows Reserve Bank of Zimbabwe to build up reserves gradually in time, without necessity to acquire them on foreign markets. This came altogether with programme to attract foreign miners to invest and mine in resources rich country. Under… previous management… foreign miners were forced to leave and their assets had been nationalised. As usual on such occasions, lack of specialist cadre, disrupted supply chains etc. led to sectoral collapse.

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In 2023 gold mining entities operating in the country provided an output of 30.1 t. (35,3 t. in 2022, 26,9 t. in 2021). That could be even more but all the violence, instability and destruction occurring historically in the country, heavily undermined country’s perception as mining friendly localisation, with only the boldest of miners with highest risk/return assumptions dare to. Apart of insufficient infrastructure, there is lack of geological works on deposits or even studies. Yet in the race for the gold deposits of this African country, there are both small entities, international corporations and ASM miners. And so, Zimbabwe has the highest percentage of untapped gold in the world, with many mines in the country operating without geological verification of resources. Country has huge deposits of valuable minerals - including gold, platinum, chrome, nickel, precious metals and diamonds.

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Since 2009, artisanal gold mining (ASM) became one of the fastest growing sectors in the country, especially since it gathered some governmental support i.e. in form of providing basic mining equipment. Sectoral boom occurred as response for galloping hyperinflation and economic fall. Independent entities estimate that even 63% of gold mined in Zimbabwe comes from ASM mines. In terms of volumes it would be more realistic to approximately double official output.

In the not so far past, artisanal and illegal mining had two options to sell output. They could’ve sell it to government gold purchaser "Fidelity Printers and Refiners". However, payments were being made with a delay of up to two weeks. Additionally these were made in half in local currency and in half in USD. Meanwhile, private buyers, i.e. from South Africa, were willing to give better price, pay in American dollars or foreign currency, immediately and with no delays. As a result, 2019 data estimate 34 t. to leave Zimbabwe illegally to neighbouring countries like South Africa, while Fidelity Printers and Refiners reported 38 t. mined and purchased. One could only imagine losses that local government occurred by lost taxation on mining, export, and inability to sell volume by themselves. Although at some point pandemic of Covid 19 disrupted illegal supply chains, which increased number of intermediaries.

Summary

Aspekt planowania i rzeczywistość to dwie różne rzeczy. Wykorzystanie złota, jako składowej koszyka rezerwowego stabilizuje walutę, ale oznacza również konieczność posiadania zrównoważonej gospodarki wewnętrznej i odpowiedzialnego bilansu importu / eksportu. Niedawna obniżka stóp procentowych przy denominacji ze 130% do 20%, inflacja również spadła, ale lokalny bank centralny jest daleki od posiadania wolnej woli politycznej, a przynajmniej jest za taki powszechnie postrzegany. Dlatego też, w trosce o stabilność Zimbabwe, należy mieć nadzieję, że ten, lub następny autorytarny prezydent nie zażąda „drukowania pieniędzy” na dodatkowe wydatki.

Planning aspect and reality are two different things. Usage of gold as backing up basket stabilises currency, but also implies having balanced internal economy and responsible import/export balance. With recent denomination, interest rates decreased from 130% to 20%, inflation went south as well, but Reserve Bank of Zimbabwe is far away from having political free will, or at least is perceived as such. Hence for sake of Zimbabwean stability, everyone have to hope this or next authoritarian president won’t demand ‘money printing’ for extra spending.

There is big red question mark with regards to international FX exchangeability of currency (not applicable yet), general FX market and especially appreciation or depreciation of market value of assets composing backing basket. And too expensive ZiG may affect country’s trade. And last but not least - It’s not 19th century anymore. Whoever expects to see full convertibility of such currency for gold, on demand, simply was born in a wrong century. With regards to Europe, pre First World War it happened on demand, but financial disparities generally made it ‘dead rule’ for masses. Between World Wars, it was possible from certain volume – again, beyond financial levels of normal citizen. After Second World War, it happened only on demand of Central Banks.

Seems that for next years, Zimbabwe will continue to exist with multiple legal tenders. Forcing gradually usage of ZiG internally, while acquiring US dollars from internal market (and gold of course), and using them reserve buildouts and for i.e. international trade.

So does ZiG have a chance to heal Zimbabwe? In theory, in the long term, yes. Because securing it a currency-gold basket is a promise. But in practice, the country's statistics and history of instability, and the points raised above, make this one much more likely to be broken than delivered. In fact, ZiG is based on user faith that the issuer will keep its promise this time.

How strong is your faith, then?