A couple of months back team of researchers from Nepal visited
Sri Lanka to conduct a research study about the falling Sri Lankan economy. They
gathered facts about the wrong decisions made by rejected President Gotabhaya
Rajapaksa and the government against corvid and debt restructuring. A case
study about such matters is vital for future decision-making in such crises.
The Sri Lankan government didn't conduct such studies about Zimbabwe, Lebanon, and countries that faced economic crises before us.
What are the efforts those countries have taken so far to
avoid inflation?
And how did they restructure the debts?
Now Zimbabwe has launched gold coins to be sold to the public in a bid to tame runaway inflation that has further eroded the country's unstable currency. At the time of the launch Monday, the cost of Mosi-oa-Tunya coin was $1,824 US.
The unprecedented move was announced Monday by the
country's central bank, the Reserve Bank of Zimbabwe, to boost confidence in
the local currency.
Trust in Zimbabwe's currency is low after people saw
their savings wiped out by hyperinflation in 2008 that reached $5 billion US, according
to the International Monetary Fund.
With strong memories of that disastrous inflation, many
Zimbabweans today prefer to scramble on the illegal market for scarce U.S.
dollars to keep at home as savings or for daily transactions. Faith in
Zimbabwe's currency is already so low that many retailers don't accept it.
The central bank disbursed 2,000 coins to commercial
banks on Monday. The first batch was minted outside the country but
eventually, they will be produced locally, according to the governor of the
Reserve Bank of Zimbabwe, John Mangudya.
The coins can be used for purchases in shops, depending
on whether the shop has enough change, he said.
"The government is trying to moderate the very high
demand for the U.S. dollar because this high demand is not being matched by
supply," said Zimbabwean economist Prosper Chitambara.
"The expectation is that … there will also be
moderation in terms of the depreciation of the local currency, which should
have some kind of stabilizing effect in terms of pricing of goods," he
said.
It can trade for cash
Any individual or company can buy the coins from
authorized outlets such as banks and can keep the coins at a bank or take them
home, according to an announcement by the country's central bank. Foreigners
can only buy the coins in foreign currency, said the central bank.
Called Mosi-oa-Tunya, which in the local Tonga language
refers to Victoria Falls, the coins "will have liquid asset status, that
is, it will be capable of being easily converted to cash, and will be tradable
locally and internationally. The coin may also be used for transactional
purposes," said the central bank. People holding the coins can only trade
them for cash after 180 days from the date of buying, the bank said.
The coins, each weighing one troy ounce with a purity of
22 carats, can also be used as security for loans and credit facilities, said
the central bank. The price of the coins will be determined by the
international market rate for an ounce of gold, plus five percent of the
cost of producing the coin.
Internationally, gold coins are used in countries such as
China, South Africa and Australia to hedge against inflation and as an
investment opportunity, although they are not as widely used as currency as
envisaged by Zimbabwe's central bank, said Chitambara.
"For Zimbabwe we are in chronic hyperinflation so
the expectation is that there will be a huge uptake of these gold coins,"
he said. However, most Zimbabweans struggle with daily survival and won't be
able to buy them, he said.
"For the common man, there is not really much to
benefit directly from this, especially if you don't have any excess cash,"
said Chitambara.
"Many people have no money for bread, let alone for
savings," he said. "The expectation is that indirectly it will benefit
the ordinary person through moderating the prices."
Companies with excess cash can find the coins useful to
store value and also as an alternative investment asset, although individuals
and companies are likely to continue preferring the dollar because "it is
convenient and highly liquid," he said.
Selling the coins in fast depreciating local currency
could also result in "rent-seeking behavior, speculation, and arbitrage
within the economy," as some could buy using local currency and then sell
in dollars later, he said.
Gold deposits
The fact that Zimbabwe's central bank would have to buy
the gold from miners of the metal such as informal artisanal miners could also
present challenges and result in increased smuggling, analysts say.
"Gold deliveries in Zimbabwe have significantly
recovered because of the appetizing U.S. dollar payments offered to artisanal
miners," noted securities firm Morgan & Co in a market intelligence
report.
"However, should there be a disparity between the
amount of U.S. dollars used to purchase the gold from miners and the U.S.
dollars used to pay for the coins, this could squeeze the central bank and its
intermediaries' foreign currency reserves. If this ripples to artisanal gold
miners, this could result in low deliveries to Fidelity Printers and increase
gold smuggling activities," noted the Morgan report. Fidelity Printers, a
subsidiary of the central bank, is the country's only authorized gold buyer.
Zimbabwe has substantial gold deposits and exports of the
precious metal are one of the southern African country's major foreign currency
earners. Gold production improved to about 27 tonnes in 2021, compared to 17
tonnes in 2020, according to official figures. Small-scale producers such as
poorly regulated artisanal miners contributed 17 tonnes of the gold
delivered in 2021, according to official figures.
Gold smuggling has been rampant. The country is estimated
to be losing about $100 million worth of gold monthly to smuggling, Home
Affairs Minister Kazembe Kazembe has said. Smuggling is costing the country
about 33 tonnes of gold annually, according to a report issued this month
by the Center for Natural Resource Governance, a local natural resources
watchdog.
Legally, all gold mined in Zimbabwe is supposed to be
sold to the central bank, but many producers prefer to smuggle the gold out of
the country in order to get payment in U.S. dollars.
Afterword
If Sri Lankan central bank releases such limited minted
coins, all of them will be purchased by parliament members and oligarchs. The best
antidote to hyperinflation is anti-corruption and filling the parliament with
intellects rather than drug dealers and thugs.
By Polito
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