Economic Implications and Monetary Policy Considerations of Zimbabwe's New Gold-Backed Currency (ZiG)

By Chinedu Okoye 

Background Story:

Zimbabwe introduces a new Gold-backed token (ZiG) to combat excessive inflation and currency depreciation. The ZiG trades at 10.51/$1 as at yesterday's open. The Central Bank looks to stem inflation and exchange rates, stabilize their monetary system.

As at the time of this article, Gold was trading at 2344.25/Oz. Whilst there might be positives to the sixth attempt at changing the country's currency, there are also complications and negatives which are to be considered.

Our Analysis surmises that there could be implications for; goods/services prices, asset prices, trade, investment, and monetary policy. We discuss these in detail and make possible implications for monetary policy and a broad-based model to manage the country's peculiar economic environment .

Price Level:

All things being equal (and in the short term), the value of ZiG would most likely move with gold's value but the prices are essentially unchanged in the short-term. The annual inflation rate in Zimbabwe accelerated to 34.8 percent in January from 26.5 percent in December 2023. Interest rates currently stand at 55%.

Price and exchange rate stability are intertwined and seem to be the focus of the country's Central Bank. There could exist a disparity between the prices of goods/services in ZiG, and prices of said goods in its Gold equivalent (that is the amount of Gold the unit of ZiG represents).

As a result, in times of appreciation/depreciation of the metal relative to other currencies, we could see the Gold prices (the value of one unit of ZiG) change at a different pace and/or direction.

Where the yellow metal appreciates, without a change in the currency prices, gold prices rise but this is not captured in the computation of the Consumer Price Index, creating a nuanced or inaccurate view of overall prices as it affects the price of exports and imports in other currencies.

Asset Prices:

The currency may restore value to financial securities impeded only by exchange rate and inflation risks. But these are not the only dynamics considered by investors. Insolvency and default risks still linger if revenues and earnings stay unchanged.

The fundamentals behind government securities don't make for the most positive outlook. As of 2019, the country's debt-to-GDP ratio was at 95%, and data for 2022 stood at 92.6%. The country is in need of policies and necessary structural reforms that could improve the outlook. These issues simply aren't addressed by a dollar-backed currency.

The allure of government and private securities is limited to possible currency appreciation, but the fundamentals remain largely unchanged as gold inflation isn't explicitly addressed. Thus the effects on net capital inflows are minimal, if not negligible.

Balance of Payments (Trade and Investment):

A strong currency has trade and investment implications, in that although imported input costs would tend to be cheaper, prices of imported finished goods could also be on a downward trend. This may bode well for importers of components and finished goods, but may harbor challenges for the local industry as they struggle to compete on price in home and international markets.

As a member of the African Continental Free Trade Agreement, the local industry is exposed to competition from countries operating on the Fiat system which is basically every AfCFTA partner. This brings the discussion to monetary policy limitations and considerations for currency model.

ZiG and Central Bank Policy Limitations and Adjustments:

On the surface, the ZiG carry some positives in that it could create a form of stability to the value of the currency and might reverse the inflation trend. Inflation in the country increased 10220.99% in the ten years from 2013 to 2023. This amounts to an annual annualized average of 1022.09/$1 per year.

Monetary Policy tools for the Central Bank are limited as interest rates have a more direct impact on the money supply in a fiat currency system relative to commodity backed currencies. Though it could still affect the money supply in a gold-backed system - through lending that stimulates economic activity.

However raising rates could lead to difficulties managing the peg to Gold. Commodity-backed currencies do not provide much room for flexibility in managing economic shocks as the money supply is tied to a commodity that is in limited supply.

Deflation risks also loom as Money Supply would not always expand sufficiently enough to accommodate growing economic activity. The model for price targeting would need to be modified as well under this commodity-backed system.

Gold and ZiG Price Targeting:

As mentioned above, gold and ZiG prices could move at different paces with effects on the economy. This potential for divergent moves in gold and ZiG prices creates complications as to what measure for inflation the Zimbabwean Central Bank should reference when setting monetary policy goals. 

The Central Bank would need to incorporate a model on interest rates that would be reflective and considerate of both gold and ZiG price level changes.

From the above, an increase in gold's value increases gold prices and should be met with an increase in money supply (interest rate cuts) and an increase in ZiG prices would warrant an appropriate increase in interest rates. But accounting for these moves is anything but easy.

Policy Remarks and Propositions:

The currency might address the hyperinflation and exchange instability in the short term, as businesses could plan on a seemingly stable outlook, but it doesn't address debt, gold inflation, and financial stability issues, as credit quality doesn't just increase from the introduction of a new currency, however strong and stable it may be.

Structural issues linger in the Zimbabwean economy and the ZiG is also exposed to fluctuations in gold prices. The finite nature of Gold also means that the Central Bank may not be able to sustain the amount of gold reserves necessary to maintain the value peg.

We believe that the Zimbabwean monetary authority should use this commodity backing of its new currency as an entrance and stability model, whilst slowly reducing the ZiG peg to a minimum as a calculated move back to global reserve assets. The commodity backed model is anything but sustainable.