Gold coins in same league with bitcoin
THE gold coin currency adopted by the country has received conflicting views from citizens, especially as this economic measure was coupled with an economic pressure of increased interest rate.
As such, the impact of the gold coin as a solution to the high demand for the United States dollar (USD), on value of the Zimbabwean dollar (Zimdollar) on inflation, digitalisation, and overall well-being of the majority of citizens is unclear as the economic environment suffers defective policies that limit effective use of the coin.
Zimbabwe’s one troy ounce 22 carat Mosi oa Tunya, introduced on July 25, presents as a relief mechanism from the high demand for the USD.
The same USD had initially proved to stabilise the country’s hyperinflation when it was first introduced as part of the multicurrency system in 2008 after, which the crushed Zimbabwean dollar was officially suspended in 2009.
However, limitations of the optimal supply and use of the USD currency, such as low confidence in the financial system and sanctions have always been major loopholes in the complete adoption of the greenback.
The continued use has largely secured the monetary value of citizens’ finances and investor confidence albeit ill-matched demand and supply of the hard cash.
Attempts by the central bank to address this incongruence resulted in the introduction of bond notes in November 2016, which led to a manifestation of Gresham’s law as the USD further dwindled from circulation in the market leading the economy back to the tumultuous inflationary sequence.
While the value of the coin targets holders of USD there is no evidence of demand for this alternative store of value as citizens and corporations targeted already maintain their cash value through assets and foreign and local investments.
Without sufficient foreign reserves and economic activities, especially exports, the local currency, in which the gold coins can be purchased by, remains vulnerable to devaluation.
The country’s monetary autonomy, heavily watered down by use of the USD and fiscal and monetary policy vulnerabilities, has denied the central bank capacity to responsibly raise money supply and as such a significant increase in interest rates has been subsequently witnessed.
Investment and economic growth, as gates for foreign currency inflows, are afflicted the most.
The contradiction between unfavourable interest rates and foreign currency demand weakens, in part, the purpose of introducing the gold coin as value acquired may not be realised especially if the coin is sold back in the Zimbabwe banking system.
While the gold coins can be bought in both USD and the local currency, the inflationary value in the local currency together with the undesirable official exchange rate diminishes the reselling value of the coin in the local currency which discourages initial purchase in USD, if ultimate purchase is necessary.
Also, from a social perspective, neither gold coin nor increased interest rate addresses the impact of rapid inflation on the general citizen’s money value, in the short term at least, thus making the economic measure highly exclusionary.
The steep upsurge of the policy rate to 200% while aimed at curbing currency speculation only poses as a symptom of policy quandary as it overtakes the willing buyer willing seller auction system rates while undermining free market rates.
Resultantly, price stability is overwhelmed by the race to the most cushioning exchange rate pushing forward the maximum employment of over-inflated prices.
Social culpability is least considered as a greater portion of Zimbabwe formal and informal employees’ income is mainly in local currency and it goes without saying how the increase in interest rate adversely affects the consumption capacity and decision.
Furthermore, small businesses and general citizens that thrive on loans are disregarded in the economic measure.
The gold coin neither addresses arbitrage, currency speculation or at least price stability of its own value as the market forces do not determine the exchange rate.
The official current exchange rate of the gold coin is 1:441,79 while the market exchange rate sits at ranges between 600 and 950.
This sizable variation repels purchasing of the coin in USD and the nature of the coin as a lucrative means of storing value or investing.
Many versions of the Gold Currency have emerged, including the Digital Gold Currency (DGC), which have been introduced in the global markets since the mid-1990s. The US, UAE and India launched their gold-backed DGC in 2020.
The intent is to protect consumers and businesses from volatile swings of the market. The USG token (DGC) is currently trading at US$1 370.
The emergence of gold-backed currencies world over is no new concept especially as a panacea to economic and political ills.
However, optimal adoption is limited as gold coins and tokens are not yet universally traded at equal values, countries that suffer poor governance carry higher management risks, and governments may fail to practise autonomy due to the independent nature of gold-backed currency from financial systems.
However, governments are keen on introducing gold-backed trading and reserves as alternatives to the weakening US dollar as has been the case with the recent China and Russia gold backed trading standard. Zimbabwe’s public finance management policies and practices have proved deficient in addressing illicit financial flows, transparency of budget utilisation and excess unbudgeted public expenditures and as such the public management risks regarding adoption of the gold coin is still high.
Moreover, irresponsible monetary autonomy further devalues the local currency. Pertinent to a successful adoption of the gold coin is the actual gold reserves’ sufficiency in backing the coins and whether external versus domestic minting is a sustainable public and budgeted expense.
Considering the exclusionary nature of the purchase value of the coin, responsibility lying on taxpayers who are largely excluded from purchase and benefit to elites who largely perpetrate tax avoidance and evasion are highly ill-matched.
From a social perspective, more value is retained on money and investments outside of local financial institutions and as such adoption of the gold coin may result in the local buying and selling of the instrument prices.
Resultantly, this economic measure may exacerbate the local financial crisis at the current management risk levels. While adopting the gold coin is a positive step towards digital currencies, issues of liquidity and safe storage still need to be addressed.
The country is already inclined to hoarding and storing greenbacks ‘under mattresses’ which has resulted in a surge in armed robberies and as such if the same practice cascades to how the gold coin is stored, crime may worsen.
Another popular digital currency, the Bitcoin, was introduced into the global market in 2009 and has gained bankable momentum where countries such as the Central African Republic have adopted the cryptocurrency as a legal tender.
Like the DGC the bitcoin limits monetary autonomy and has anti- bureaucratic and inflationary systems , but unlike the DGC, is highly price volatile. In essence, the DGC provides better investment and savings stability.
The Gold Currency as both a physical and digital measure of maintaining value is gaining momentum and worth introducing into global markets as a constant alternative to the US dollar.
However, the economic and fiscal environment in which it is being introduced limits its effectiveness. With concerns about levels of possible arbitrage and inflation, and exclusionary value of the coin, its presence in the market may not address actual economic strains regarding excess supply of local currency units and mismatched official and market value of the Zimdollar.
The coin is not a solution to economic decline unless it comes with resolutions of flawed economic policies and practices such as review of the amount of local currency injected into the market and the auction system USD rates. at highly discounted local
Jaravaza writes in her personal capacity. Her interests are in sustainable entrepreneurship and social economic policies and activitiesThese weekly New Horizon articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics society (ZEs) and past president of the Chartered governance & accountancy Institute in Zimbabwe (CgI Zimbabwe). — kadenge.zes@ gmail.com and mobile No. +263 772 382 852.