A last throw of the dice

FINANCE minister Mthuli has said government is working on a plan in which the exchange rate will be linked to a hard asset such as gold as part of measures to buttress the local currency. The announcement comes less than a week after President Emmerson Mnangagwa hinted on plans for a structured currency.

The plan, in its early stages, is expected to provide a lasting solution to currency volatility, Ncube said on Monday ahead of the Conference of African ministers of Finance meeting to be hosted by Zimbabwe from February 28 to March 5.

“So, the idea is to make sure we manage the growth of liquidity so that it is in correlation with money supply growth and inflation. The way to do that is to link the exchange rate to some hard asset such as gold but this is a structure that we are still working on,” he said.

“We will have a currency board where the growth of domestic liquidity is governed by the value of the asset that is backing the currency in the first place. That is what was meant by the President but the work is ongoing in terms of how to really structure it and an announcement will be made in the fullness of time.”

The asset-backed exchange rate plan represents the government's last throw of the dice as it battles to keep the Zimdollar in circulation.

This comes on the back of a sharp depreciation of the local currency and the quickened pace towards the use of the US dollar amid calls for full dollarisation of the economy.

The Zimdollar has been elbowed out of transactions as eight out of 10 transactions are conducted in the United States dollar. Authorities are adamant that the local currency is here to stay and will do everything in their powers to keep it afloat.

Last year, government legislated that the dual currency regime will be in place until 2030 after business had prodded government to extend the use of the dollar beyond 2025.

As the market keenly waits for the new structured plan, the message is clear: The local currency has lost its functions of being a medium of exchange and a store of wealth. The rejection of the Zimdollar in the informal sector and the punishing exchange rate in formal business is ample evidence that the local unit is on its way out.

Just like in 2008, the market spoke boldly declaring its preference for the US$ to any other currency. However, authorities do not subscribe to such a thinking.

But government’s transgressions which include paying for infrastructure projects in local currency and allowing suppliers to inflate prices of goods and services fuelled the rout of the Zimdollar as suppliers and contractors offloaded the local currency on the parallel market.

By the time the value for money principle was introduced, it was too little too late. The horse had bolted.

Since the reintroduction of the local currency in 2019, government has come up with a host of measures to buttress the local unit.

It seems the measures are not enough as they have failed to address one fundamental issue: Confidence.

It is an area which the asset-backed plan will find insurmountable.