Re-integrating Zimbabwe with the Global Economy.

By Chinedu Okoye 

Introduction:

For over three decades, Zimbabwe has grappled with economic challenges that have left it isolated from the global economy. Since its debt default in 1990, the nation has faced exclusion from international capital markets, hindering its ability to access vital financing and restore macroeconomic stability. 

The, recent developments suggest a shift towards reintegration with the global community. Collaborative efforts with the International Monetary Fund (IMF) and the introduction of a new currency, ZiG, backed by gold reserves, show a desire and commitment to address long-standing issues of debt, inflation, and investor trust. 

We discuss the issues and key policy reforms and strategic interventions that are imperative to rebuild credibility, restore confidence, and pave the way for sustainable growth and development.

Reuniting with the Global Economy:

Zimbabwe has been banished from the international capital markets since 1990 due to its debt default. The country now seems to collaborate with the IMF to clear past debts and create stability in the economy. But this arrangement is contingent upon certain intentional steps, begining with the introduction of a new currency, ZiG, to address the continual decline in the Zimbabwean Dollar and to curb soaring inflation.

Following the ZiG, are other conditions including compensation of farmers who were displaced under the former President Robert Mugabe's administration, and a plan to make good on past debts. 

The International Monetary Fund has indicated a commitment to work with the nation to restore macroeconomic stability and re-engage with the international community, as these are essential in restoring confidence and accessing external financing. A $2 billion bridge loan is being negotiated, to help clear its debt with the World Bank, AfDB, and the European Investment Bank.

Building Back Credibility:

The country has a lot to do in the way of restoring confidence back into the system. The Mugabe years and the economic history of the less than complex economy creates a burdensome task but doable with adequate political will.

The first step on this journey has been to introduce a currency with perceivable strength from its backing of the country's Gold Reserves. ZiG is essentially Gold, and the country's Central Bank boasts of $285 million worth of gold reserves—or 2.5 tons. It is a foundational step to restoring confidence in the country's monetary system.

ZiG traded at 12.85/$1 at today's open as Gold flirts with the high $2400/t oz level, but there are legitimate concerns that the currency may not necessarily hold up the economy due to the above concerns of debt, exclusion from the international market, and investor trust in the government.

ZiG helps, but to a negligible extent. The government would need to implement hard structural reforms that eliminate inefficiencies, negotiate settlements with aggrieved parties, in order to secure funding from the IMF to clear its debts with past creditors.

Monetary Policy: The Challenge of Dual Prices

The Central Bank would also have to reevaluate its Monetary Policy and currency stance to make it compatible with a largely fiat world. Innovative thinking on monetary policy is required, given the potential limitations of a Gold-backed system.

As pointed out in our previous paper "Economic Implications and Monetary Policy Considerations of Zimbabwe's New Gold-Backed", the effective gold system may have dual implications for prices, further complicating the Apex Bank's aim of simplicity, certainty, and predictability in the financial system.

With regards to the money supply, the Central Bank has time as its reserves provide three times cover for the amount of the ZiG currency to be issued. But inflation targeting and demand controls may be more complex as there are distortions between nominal and gold prices in a Gold-backed economy.

The relative prices of goods manufactured in the country would fluctuate with the value of other currencies in Gold. As gold rises relative to the US Dollar, prices of ZiG-denominated goods (and assets) increase, reducing the competitiveness of the country's exports in the international market.

ZiG inflation would be determined by market forces (for goods bought and sold within the country), and the value of Gold in currencies of the countries would determine import prices. ZiG inflation could blind the authorities to Gold inflation, with a negative impact on local industry because, if gold increases in value, nominal (or ZiG) prices may seem to be falling but gold prices rising.

Nominal prices (for goods produced wholly locally) could be rising, while Gold prices (for imports or foods with imported components) falling. If the Central Bank focuses on nominal prices, the response would be to hike interest rates. This increases borrowing costs for producers and further stokes declining export activity.

Zero Equilibrium Views:

- A review and deepening of the scope of monetary Policy: The bank would need to account for both Gold and Nominal Prices and incorporate it into its  monetary policy computations in order to formulate a suitable framework that suits the economy's unique characteristics.

- Align Long-term Currency Reserves with a Fiat world: The Monetary Authority would need a viable plan to gradually phase out the Gold-backed system in the long run or modify it to suit a fiat-based world.

- A Balanced Fiscal Approach: The Authorities would need to enact appropriate fiscal policy measures aimed at improving efficiency and government revenue, friendly industrial policies and support programmes to boost productivity and. This will attract investments into public and private sector securities to negate the potential trade impact from gold inflation.