How Zimbabwe fights inflation with gold

By Swann Collins, investor and consultant in international affairs – AssetsforWealth, August 23, 2022

Plagued with hyperinflation since 2007, the government of Zimbabwe decided to strengthen the Zimbabwean dollar starting the sale of gold coins on July 25 to strengthen the national currency.

Hyperinflation in Zimbabwe began in February 2007. During the height of inflation from 2008 to 2009, it was difficult to measure Zimbabwe’s hyperinflation because the government stopped filing official inflation statistics.

However, Zimbabwe’s peak month of inflation is estimated at 79.6 billion percent month-on-month, 89.7 sextillion percent year-on-year in mid-November 2008.

In April 2009, Zimbabwe stopped printing its currency, and currencies from other countries were used. In mid-2015, Zimbabwe announced plans to have completely switched to the United States dollar by the end of that year.

In December 2015, Patrick Chinamasa, the Zimbabwe Minister of Finance, said they would make the Chinese yuan their main reserve currency and legal tender after China canceled US $40 million in debts.

However, this was denied by the Reserve Bank of Zimbabwe in January 2016. In June 2016, nine currencies were legal tender in Zimbabwe but it was estimated 90% of transactions were in US dollars and 5% in Rand.

In June 2019, the Zimbabwean government announced the reintroduction of the Real Time Gross Settlement dollar (RTGS), to be known simply as the “Zimbabwe dollar”, and that all foreign currency was no longer legal tender.

By mid-July 2019, inflation had increased to 175%, sparking concerns that the country was entering another period of hyperinflation. In March 2020, with inflation above 500% annually, a new task force was created to assess the currency problems.

By July 2020, annual inflation was estimated to be 737%. In 2022, the country experienced another period of high inflation, which jumped to 131.7% in May from 96.4% in April. The government was struggling to pull Zimbabwe from the grips of an economic crisis characterized by high inflation, a rapidly devaluing local currency, 90 percent unemployment, and declining manufacturing output.

To save the national economy and currency, the central bank of Zimbabwe decided in 2021 to buy gold bars from a private company in order to issue gold coins in 2022.

The gold coins are minted by Fidelity Gold Refineries (Private) Limited. Founded in 1978 and fully owned by the Reserve Bank of Zimbabwe, the company is the sole gold buying entity and refining entity in the country.

The new gold coins weigh one troy ounce and are made of 22-carat gold. Each coin costs the price of one gold troy ounce. The coin was called “Mosi-oa-Tunya”, which means “rumbling smoke” – this is how Victoria Falls is called in the language of the local Lozi people.

The value of each coin is equal to the price of an ounce of gold plus 5% to cover the cost of minting. 

These gold coins can be purchased from authorized banks. The average annual salary of a civil servant in Zimbabwe is 2600 US dollars, and according to the state newspaper Herald, 4475 gold coins have been sold since their introduction last month. The $180 gold coins are due to be issued in November this year to make them more accessible to citizens.

This program is now a success. Authorities managed to increase the value of the Zimbabwean dollar, dry up excess liquidity and remove the possibilities for speculation. In August 2022, the gap between the official rate and the parallel market rate for the Zimbabwean dollar has narrowed since the start of the sale of gold coins on July 25. The street exchange rate for large transactions – more than 1 million Zimbabwean dollars (ZD) – fell from ZD 950 to ZD 740 per US dollar. With small transactions, one Zimbabwean dollar is worth 620 dinars, compared to 800 dinars last month.

The high demand for gold coins helped to reduce the demand for US dollars and enable the local currency to grow in value. According to the Central Bank of Zimbabwe, more coins of a smaller denomination ($180) will be issued in November so that more citizens can buy them.

Zimbabwe’s central bank has sold 4,475 gold coins as of August 10, 2022, raising $ 3.7 billion, 90% of which was paid out in Zimbabwean dollars and the rest in foreign currency, announced the Reserve Bank of Zimbabwe Governor John Mangudya on August 11.

Exchange rate volatility in a parallel market is one of the main reasons for price pressures in Zimbabwe, where inflation rose to 257% in July. The lack of foreign currency through official channels forced companies to move to a parallel currency market.

The issue of gold coins has already started to remove pressure on the national currency, cooling inflation and allowing citizens to hope for easier daily expenses. You will learn more about the use of gold in economies, by purchasing my book: https://amzn.to/3QNfHZu

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© Copyright 2022 – Swann Collins, writer, investor, and consultant in international affairs.

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