Can Zimbabwe Fix Weak Currency With Gold?

Zimbabwe has the world’s worst-performing currency by which it implies that the country has the worst trading currency compared to other currencies in the world. Plus, it’s one of the least valuable currencies in the world.

The Zimbabwe dollar has slumped almost 50 per cent against the United States dollar this year after plunging 90 per cent in 2023. It traded at Z$11,617 per US dollar on Monday, according to data posted on the central bank’s website.

There is everything wrong about this reality. First, it makes the Zimbabwean economy less attractive to foreign investors because no investor wants to invest in an economy when they know their money will lose value rapidly and their investment will vanish just like that.

The failure to attract foreign investors is also problematic because how do you develop a country without foreign investments? That does not happen given that domestic investors are not cash-rich to afford to invest in every aspect of development to drive the economy.

That is why you see development economists are so obsessed with the concept of Foreign Direct Investments (FDI) the lack of which stifles job creation and economic development, which ultimately perpetuates a cycle of poverty and underdevelopment.

The other drawback of a weak and unstable currency is that it complicates international trade. More generally, it means that a country’s ability to import, especially those that rely heavily on imported goods, will be affected more than others.

That, in the end, will reduce export earnings and lead to trade deficit and put further pressure on the currency.

You may think that that is theory but it is exactly what Zimbabwe has been experiencing. Zimbabwe’s economy has been struggling and ordinary Zimbabweans have had tough times to make ends meet, despite their country being endowed with natural resources.

Zimbabwe’s economy has rebounded from contraction in 2020 (-7.8 per cent) at the height of the Covid-19 pandemic to stabilising at 8.4 per cent in 2022, but growth is expected to decelerate to 4.1 per cent in 2023 and 3.6 per cent in 2024.

However, what is more alarming is high consumer prices the country has been experiencing. Consumer prices in Zimbabwe were at 30.2 per cent between 2011 and 2019, way beyond the Sub-Saharan African average of 8.3 per cent, according to the International Monetary Fund (IMF) data.

Zimbabwe saw consumer prices spike at 557.2 per cent in 2020 before coming down to 98.5 per cent in 2021. However, commodity prices continued to rise to 193.4 per cent in 2022 and estimated to 314.5 per cent in 2023.

Zimbabwe also ranks the lowest out of 62 nations in Investment Attractiveness, according to Fraser Institute's 2022 Annual Survey of Mining Companies. Obviously, that doesn’t make sense for a country that the IMF ranks as high resource intensive.

To shore up its economy, the government has been borrowing among other measures to fix its economy. But that has not fixed the country’s economy, instead, it has placed Zimbabwe among the heavily indebted countries in Africa.

How Did Zimbabwe Get Here?

It all dates back to 1980 when the Zimbabwe dollar was introduced to replace the Rhodesian dollar to distinguish it from other dollar-denominated currencies. The Zimbabwe dollar previously ceased circulating in 2009 after its value was wiped out.

To give more context, during 2009-2019 the Zimbabwe dollar was subject to periods of extreme inflation, followed by hyperinflation – prolonged period of unusually higher prices – which nearly collapsed the country’s economy.

Over time Zimbabwe introduced Bearer cheques or money that has an expiry date in an effort to cope with hyperinflation. Notes of an ever-increasing denomination were introduced throughout the years, particularly in 2003 and 2006.

In 2003, the Reserve Bank of Zimbabwe issued low-denomination bearer cheques to ease cash shortage. It repeated the same in 2006 but this time with high-denomination cheques until 2008, and as much as 10 trillion-dollar notes were in circulation.

But inflation continued to ravage the economy, meaning that people have to carry huge bundles of cash to do the most basic shopping. There was a funny story back in time when people made fun of the situation in Zimbabwe that people had to carry a wheelbarrow full of cash to buy a bread.

Between 2009 and 2019, Zimbabwe operated under a multicurrency regime with the US dollar as the unit of account. In 2019, Zimbabwe authorities introduced the real-time gross settlement (RTGS) dollar, later renamed the Zimbabwe dollar.

With all this not working, Zimbabwe wants to back its currency with gold in an effort to end exchange-rate instability, Zimbabwe Finance Minister Mthuli Ncube said.

“In order to manage growth of liquidity, we may link the exchange rate to a hard asset such as gold,” Ncube said in an online press briefing held Monday to announce a conference of African ministers that Zimbabwe will host at the end of this month.

Zimbabwean President Emmerson Mnangagwa last week signaled the authorities are considering a revamp of the world’s worst-performing currency, saying the country’s Treasury and monetary authorities were working on a “structured currency.”

The president sought to provide “policy forward guidance” to the market on currency and monetary policy reforms that are being considered, Ncube said in his first remarks since Mnangagwa’s comments on February 6.

Zimbabwe is also weighing the feasibility of establishing a currency board, he said.

“This will provide a lasting solution to the volatility” of the exchange rate, Ncube said.

The authorities have repeatedly tried to rescue the Zimbabwe dollar over time. With the latest move, the government is committing to restore its value.

Whether this will actually fix the Zimbabwe remains to be seen, although many are still skeptical given that similar moves have not yielded tangible results.