Investors excited by Zimbabwe plan to mint gold to curb inflation

President Mnangagwa is reportedly desperate to shed some of the legacy economic problems his administration inherited.

inflation in zimbabwe
A shopper displays a five hundred million dollar Zimbabwean bank note June 29, 2008 in Bulawayo, Zimbabwe[File: John Moore/Getty Images)

Harare, Zimbabwe – Zimbabwe is set to introduce gold coins that will enable investors to store value within the country as inflation spirals out of control and the local currency continues to rapidly devalue against major currencies.

The move comes after inflation for June jumped to 191.6% from 132% in May.

In a statement on Monday, the southern African country’s central bank chief John Mangudya announced the new gold coins would be available through normal banking institutions.

“The Reserve Bank of Zimbabwe’s Monetary Policy Committee (MPC) resolved to introduce gold coins into the market as an instrument that will enable investors to store value,” Mangudya said. “The gold coins will be minted by Fidelity Gold Refineries (Private) Limited and will be sold to the public through normal banking channels.”

Fidelity Gold Refineries (Private) Limited is the sole gold buying entity and refining entity in the country and is owned by the central bank.

The central bank’s monetary policy committee expressed “great concern on the recent rise in inflation”, which increased by 30.7% on a month-on-month basis for June 2022.

Authorities are struggling to pull Zimbabwe from its current economic crisis due to high inflation and a rapidly devaluing local currency, Unemployment is also at 90 percent, according to the Zimbabwe Congress of Trade Unions (ZCTU).

The country’s inflation has been on an upward trend in the past three months as inflation pressures rise, driven by the continued weakening of the Zimbabwean dollar which is trading at $1:650 on the black market.

The printing of new money by the central bank has also worsened the situation, reversing gains made in the past two years that saw inflation decrease from a peak of 800 percent in 2020 to 60 percent in January this year.

As part of measures to stabilise the economy, the central bank will more than triple the lending rate from 80 percent to 200 percent per annum and raise the interest rate from 50 percent to 100 percent per annum.

Harare-based independent economist Victor Bhoroma commended the apex bank’s interventions, saying positive interest rates would reduce both “speculative borrowing in the economy and money supply growth”.

“Gold coins are a good idea in terms of storing value. It can be a way to reduce pressure on the US dollar if sold in Zim dollar thus stabilising inflation,” Bhoroma told Al Jazeera. “But they will likely be indexed in US dollar which means it’s a fundraising scheme to get USD from the market by the central bank. The success will thus depend on confidence in the central bank as the seller of the coins and guarantees that back them.”

If confidence continues to dip, the market will maintain a preference for hard currency, he said.

A welcome development

Investment analysts seem to be cosying up to the idea of gold coins.

Batanai Matsika, the head of research for stockbroking firm, Morgan & Co, said the gold coin was a welcome development in a market starved of investment options and will help investors hedge against inflation.

“For a long time, the market did not have many investment options and this is a new asset class,” Matsika told Al Jazeera via telephone. “The thinking was inspired by the need to come up with an instrument that addresses the inflation problems in the economy where purchasing power has been eroded. From what we are gathering, this is going to be a store value.”

Gold has certain fundamentals that help it hedge against inflation and geopolitical risk, he said, adding that the concept was not entirely new.

“The idea is being emulated from the Kruger rands,” Matsika said. “It’s also a way of opening the gold market to ordinary investors. From an investment advisory point of view, it’s an area that is potentially exciting. It could prove to be worthwhile.”

Harare-based Akribos Capital economist Tatenda Mabhande expressed optimism about the gold coin’s ability to act as a store of value.

“Regarding the coin acting as a store value, it’s a good step given that the Zimbabwean dollar’s value was being eroded. People were going after US dollar as a store of value,” Mabhande told Al Jazeera. “It is going to ease pressures on the US dollar but demand for the USD will still be there. We don’t see the gold coin addressing exchange rate volatility though.”

He said the gold coin was an attempt by government to reduce demand for the US dollar.

“For as long as Zimbabwe remains a net importer, there will still be demand for dollars,” he said. “Along the way, bad money will drive good money out of the market. We are likely to see the coins disappearing as well.”

In order for the gold coins to be effective, Mabhande said those seeking to acquire them should be able to pay with Zimbabwe dollars and not US dollars, to mop up excess local currency in circulation.

Mabhande added that the central bank needs to ensure that the face value of the gold coin “is always greater than its intrinsic value” for them to be treated as money and for investors to use it as an alternative to the US unit.

Central bank spokesperson Isaac Muzambi did not respond to queries from Al Jazeera on the expected timeline of introduction of the gold coins.

New measures

The new measures by the central bank come as President Emmerson Mnangagwa, who has been in charge since November 2017, is reportedly desperate to shed some of the legacy economic problems his administration inherited.

On Saturday, Mnangagwa had promised to announce additional economic measures to stabilise the economy. On Monday, finance minister Mthuli Ncube announced a number of measures that will, among other things, see civil servants’ salaries being increased,  and health sector and teachers’ allowances being reviewed upwards.

Ncube also blamed businesses and Zimbabweans for spurring inflation and causing the collapse of the Zimbabwe dollar.

Speaking to journalists in the capital, he said his claims were evidenced by recent “econometric studies done by the University of Zimbabwe” and that inflation “is not being caused by the normal real economic variables but by behavioural variables such as confidence, adverse inflation expectations”.

Ncube also banned discounting of prices for payments made in US dollars, warning culprits would be prosecuted and operating licences revoked for offenders.

Bhoroma said the minister’s measures were nothing to write home about.

“There was nothing big from the Treasury statement considering the fact that the USD is already legal tender based on the Finance Act of 2009 & 2012,” he said. “The law to ensure US Dollar credit is protected is a welcome move to bring stability and certainty to banks that get lines of credit for onward lending to the business sector.”

He said the removal of levy on diesel and cuts on fuel levy would have a minimal effect on the fuel price in the country because prices in Zimbabwe remained the “highest in the SADC region, thus making local products uncompetitive”.

Source: Al Jazeera