International Finance
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Zimbabwe to mint gold to curb inflation, investors excited

IFM_ Zimbabwe to mint gold
President Mnangagwa hopes to correct some of the systemic economic issues his administration inherited

Zimbabwe will introduce gold coins as storehouses of wealth within the country. The African country is in chaos as its national currency plunged to a new low. Hyperinflation has been the bane of the nation for years. In June, inflation rose to an abysmal 191.6% from 132% in May.

John Mangudya, Zimbabwe’s central bank chief, introduced the new gold coins, which will be available through usual banking institutions. He presides over the Monetary Policy Committee, which decided to mint gold coins.

The coins will be minted at Fidelity God Refineries (private) Limited, the sole refining and gold buying entity in the nation and is a subsidiary of the central bank.

The government has been trying to rescue Zimbabwe from hyperinflation, devaluing currency, 90% unemployment, and a free falling manufacturing output.

The Zimbabwean dollar, which currently trades at $1:650 on the black market, has continued to lose value over the previous three months, increasing inflation pressures in the nation.

The central bank’s printing of new currency has also made things worse by undoing the progress made over the previous two years, during which time inflation declined from a peak of 800 percent in 2020 to 60 percent in January of this year.

The central bank will increase the annual interest rate from 50% to 100% and more than triple the lending rate from 80% to 200% per year to stabilize the economy.

Independent economist Victor Bhoroma, based in Harare, applauded the top bank’s actions and claimed that positive interest rates would cut down on “speculative borrowing in the economy” and the expansion of the money supply.

According to Bhoroma, gold coins are a wise choice for safeguarding value. If offered in Zim dollars, it may be a means to stabilize inflation while easing pressure on the US currency. But they’ll probably be indexed in US dollars, suggesting that the central bank uses this as a fundraising ploy to obtain USD from the market. Thus, the success will depend on public trust in the central bank’s ability to sell coins and the credibility of the promises that back them.

He added the market would continue to favor hard currency if confidence keeps falling.

An eagerly anticipated development
The concept of gold coins appears to be winning over investment analysts.

The gold coin is a positive move in a market lacking in investment possibilities, according to Batanai Matsika, head of research for stockbroking firm Morgan & Co. It will also help investors hedge against inflation.

According to Matsika, there haven’t been many investment alternatives on the market for a while, and this is a new asset class. The necessity to develop a tool that solves the inflation issues in the economy, where purchasing power has eroded, was what prompted the thought, he continued. Gold will be a great alternative as a store of value.

He added that the idea was not entirely new and that some fundamentals of gold enable it to act as a hedge against inflation and geopolitical risk.

The Kruger rands are being imitated, according to Matsika. It’s also a method of allowing regular investors access to the gold market. It’s a potentially exciting field from the perspective of investment advisory. It might turn out to be beneficial.

Tatenda Mabhande, an economist with Akribos Capital in Harare, voiced confidence in the gold coin’s capacity to serve as a store of value.

Given the erosion of the value of the Zimbabwean dollar, Mabhande argued that the gold coin serving as a store value is a positive development. The US dollar was the primary store of value. Although the move may lessen pressure on the US dollar, there will still be demand for the USD. However, he added that he doesn’t think the gold coin will reduce exchange rate volatility.

He claimed that the government created the gold coin to lessen demand for the US dollar.

He continued by saying that there would still be a demand for dollars while Zimbabwe remained a net importer. Bad money will eventually push good money off the market. We’ll probably also notice the coins vanishing.

Mabhande claimed that for the gold coins to be effective, buyers must be able to make their purchases using Zimbabwean dollars rather than US dollars to reduce the amount of extra local currency in circulation.

For the gold coins to be treated as money and for investors to utilize them as a substitute for the US dollar, Mabhande continued, the central bank must make sure that the face value of the coins “is always larger than its intrinsic value.”

Isaac Muzambi, a spokesman for the central bank, did not react to questions regarding the anticipated launch date for the gold coins.

Policy changes
President Emmerson Mnangagwa, who has been in office since November 2017, is keen to solve some of the economic issues his administration inherited, which is why the central bank is taking these actions now.

Mnangagwa had pledged to reveal more economic measures on Saturday to stabilize the economy. Mthuli Ncube, the finance minister, made announcements on Monday that include, among other things, raising salaries for government employees and an upward review of education and the health sector employee allowances.

Ncube also attributed the inflation and devaluation of the Zimbabwe dollar to businesses and Zimbabweans.

Speaking to reporters in the city, he said that new “econometric studies done by the University of Zimbabwe” supported his statements and that inflation “is not being generated by the regular actual economic determinants but by behavioural characteristics such as confidence, unfavourable inflation expectations.”

Additionally, Ncube forbade discounts on rates for payments made in US dollars and warned that violators would face criminal charges and have their operating permits removed.

Bhoroma claimed that the minister’s actions weren’t very noteworthy.

He claimed that the USD is already recognized as legal currency under the Finance Acts of 2009 and 2012, and there was nothing significant about the Treasury announcement. A positive step toward bringing stability and assurance to banks who get lines of credit for future lending to the commercial sector is the law to ensure the protection of US Dollar credit.

He said that eliminating the diesel tax and reductions in the fuel levy would have little impact on the cost of fuel in the nation because Zimbabwe’s prices remained the highest in the SADC, making local goods less competitive.

World Bank’s warning
The World Bank (WB) predicted that Zimbabwe’s economy would expand by 3.7% this year, less than the government’s forecast of 5.5%.

Marjorie Mpundu, the WB’s country manager for Zimbabwe, attended the Zimbabwe National Chamber of Commerce 2022 congress on Wednesday in Victoria Falls. She said that amid slowing growth and rising inflation, the country must concentrate on price stabilization to prevent stalled recovery.

The immediate challenge, she continued, is ensuring pricing and exchange rate stability. Global experience demonstrates that it is preferable to provide targeted assistance to the poor and take advantage of the chance to promote greater efficiency to hasten the transition to low-carbon energy sources rather than providing subsidies and other distortionary measures to lessen the effects of higher energy prices.

In light of the heightened budgetary strains, it’s critical to safeguard long-term growth by ensuring sufficient funds for social safety, education, and health.

She noted that eventually, streamlining corporate regulation and boosting trade facilitation will benefit any future growth.

Mpundu claimed that despite potential uncertainties, Zimbabwe’s economic prospects appeared promising.

Due to increased global concerns, she stated there were considerable risks to the picture.

Domestic risks affect growth outcomes and are correlated with climate shocks, expansionary fiscal and monetary policies, and slower economic recovery, according to her.

WB also predicted that, despite being marginal, poverty levels would continue to reduce in 2022 even though the likelihood of a successful harvest decreases.

Having said that, Zimbabwe’s price dynamics are likewise unfavourable globally. Yes, it is anticipated that the price of gold and nickel will rise this year, but these gains will be countered by lower fuel, food, and fertilizer imports. Additionally, she added, the anticipated fall in key prices over the next two years will strain the balance of payments and lower tax collections.

Mpundu claimed that this year’s higher food costs and overall inflation levels put further strain on the budget and made things worse for Zimbabwe’s extremely poor.

To lessen the impact on the most vulnerable segments of the population, she said, there would need to be more budget support for social protection.

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