Zimbabwe had for a long time been considered Africa’s food hub based on its production levels and favourable conditions, but this was up until the 1990s when the then president, late Robert Mugabe’s mismanagement led to the country’s farming sector going down the hill.
In 1992, the government together with IMF introduced an economic structural adjustment programme in Zimbabwe which pushed the agenda of deregulation and privatisation of land leading to an increase in prices.
By 1996, Zimbabwe’s economy started to feel rapid depreciation of the local currency.
In 1997, Zimbabwe participated in the Democratic Republic of Congo’s (DRC) conflict which drained the fiscal position of the government and at around the same time, the Zimbabwean government introduced the land reform programme.
While the Zimbabwean economy was majorly agro-based, the white farmers were mainly doing commercial farming for cash and other crops like maize, and tobacco and exporting flowers to Europe to generate cash.
The land reforms destabilised the economy and a coup also saw the country placed under sanctions which resulted in an economic meltdown in the late 1990s to 2000s.
This also saw the country record the highest inflation rate in 2008 at 231,000,000 per cent.
The following year, in 2009, the government adopted a multi-currency system because the local currency had lost value due to the high inflation and this introduced the US dollars into the country’s economy.
Other currencies that were in use included the South African rand and the Botswana pula, which gave locals a variety of currencies to trade in.
This went on up until 2016 when Zimbabwe experienced challenges with foreign currency because they were mainly importing; which meant the foreign currency was flowing out of the country.
This further led to the government introducing an export incentive, the Real-Time Gross Settlement dollar (RTGS) which started to circulate in the market but the market was a bit sceptic about it because most people believed it was the re-introduction of the Zimbabwean dollar.
Despite a change in government in 2017, the Zimbabwean economy has been volatile for years which eventually led to a dependence on the US dollar by locals and institutions to trade.
This saw the governor of the Central Bank John Mangudya announce that the country was introducing gold coins known as Mosi-oa-Tunya, to offer an alternative currency.
The coins were named after Victoria Falls and are expected to be available to the public from Monday, July 25, 2022.
In an interview with markettrends.africa, economist Titus Mukove broke down the impact of what led the landlocked South African country to where it is economically and what it would take to reverse the current situation.
Listen to the interview with Titus Mukove here.
The over-relying on the US dollar in Zimbabwe has seen the inflation rate hit to 200%, compared to June’s rate, which according to the government was 191.9%, leading to workers and institutions only doing business or demanding to be paid in dollars.
“One function of money is to store value and the other is, it is a medium of exchange. Zimbabwe has been feeling the pressure to store value in terms of US dollars which was creating a huge demand for the dollars,” said Mukove.
According to the economic analyst, people in Harare, the capital city of Zimbabwe, transact only in dollars, such that people with local currency compete to get US dollars.
This also saw the government introduce the auction system in 2020 which traded every Tuesday, whereby those who had excess foreign currency could sell to those in need of foreign currency.
“But that is not enough to meet the demand for US currency in Zimbabwe. Local people in Zimbabwe demand US dollars for their daily transactions. For example, fuel in Zimbabwe. We buy it in US dollars, we do not buy it in local currency. So if I have my money in local currency, I have to look for a place to do the exchange so I can fuel my car,” added Mukove.
However, Mukove believes that the introduction of gold coins is not a long-term solution as Zimbabwe needs a holistic approach to its economy.
“We have inflation and an exchange rate that’s running away, there are a lot of things that need to be addressed in the economy for us to address the issue of macro-economic instability we are experiencing. People with excess funds can purchase value through these gold coins but there are a lot of things we need, to bring stability,” further said Mukove.
Zimbabwe has also witnessed high levels of corruption, and bad leadership that also majorly contributed to the weak economy and high inflation.
For instance, during the exchange rate system, there were people who would lay their hands on foreign currency and then later sell them to the market at extremely high prices.
“The Central Bank has indicated that these gold coins can be sold in any currency, both local and US dollars, and if we do not address this, people will still buy the gold coins at the rates available in the market and sell them at very high rates or only sell it in US dollars,” further added Mukove.
Mukove advises that the Central Bank should allow people to liquidate the gold coins in the currency for which they have been purchased. He also believes this move will reduce the demand to have or do transactions in US dollars.
“Some people and institutions were purchasing the dollars not to use them but to store them to keep the value of their wealth in United States dollar. But now there’s another investment vehicle which will reduce the pressure,” said the analyst.
He added that the gold coins are however not liquid enough to be used as a medium exchange because people cannot move around with gold coins trying to buy things because that will expose them to thieves.
“This is gold. It needs to be saved somewhere. So if I have excess money and I am not in need of using it, then I can subscribe to these gold coins and I can store value. As for ordinary people in Zimbabwe, I do not think most of them have the capacity to subscribe to these gold coins,” elucidated Mukove.
The likelihood of fake gold coins circulating in the market is very low because each gold coin will have a serial number and upon purchasing the gold coin, one is entitled to get an ownership certificate from the financial institution and they will be sold majorly by the Central Bank of Zimbabwe, even though other financial institutions will be allowed to sell them as well.
The Zimbabwean government will also sell the gold using the international monetary value of gold to prevent people from either melting it or smuggling it out of the country.
The 22-carat coin will be sold at the international bullion spot price including a 5% charge to cover production and delivery costs.
According to a statement by Central Bank, “once bought from banks and approved dealers, the coin must be kept for at least 180 days in line with the need to promote a savings culture in the country”.
As for what Zimbabwe ought to do to bring its economy back to life, Mukove believes:
“We need to address things we have control over. We need to come up with measures that can solve things that we have limited control over. We can control corruption in Zimbabwe, We can control the arbitrage opportunities in the financial sector, we would be able to stabilise our exchange rate and inflation.”
Currently, Zimbabwe is in a multicurrency system until 2025, when the government will introduce the National Development Strategy- 0ne.
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