Zimbabwe Brings Banking Changes – Numismatic News

New Zimbabwe gold coins are used as a shield against domestic inflation.

Inflation ravaged Zimbabwe launched its 1 oz .9167 fine gold Mosi-Oa-Tunya or Smoke that Thunders coins into circulation in July in hopes that the smoke and thunder would resonate enough to help tame the ‘economy.

Mosi-Oa-Tunya is the local name for Victoria Falls, one of the African nation’s few assets that has not been affected by spiraling inflation. Gold coins were issued as legal tender as people exchanged their Zimbabwean dollars for US dollars to protect their purchasing power. The new gold coins are also intended to incentivize the nation’s largest gold miners to produce more than their state-designed targets.

While the government of Zimbabwe claims that issuing gold coins is an economic success, the average citizen disagrees. A single piece of gold has a value of around US$1,800, while the average civil servant earns around US$2,600 a year. Inflation rose 256% in July as the Zimbabwean dollar fell to 481.85 Zimbabwean dollars against the US dollar, a drop from 108.66 Zimbabwean dollars to the US dollar at the start of the year.

The Reserve Bank of Zimbabwe said it initially sold 1,500 Mosi-Oa-Tunya coins, then offered 2,000 more about a week later. According to a report by the British Broadcasting Corporation on August 12, gold exports are currently the third largest source of foreign exchange for Zimbabwe, followed by platinum and remittances. Zimbabwe’s gold production has already increased by 47% in 2022. The government hopes that mined gold will account for a third of the mining industry‘s total output next year.

Zimbabwe allows the value of its gold coins to be set by international market prices. Gold coins can be converted into cash, exchanged for goods and services, or used as collateral against loans.

While silver coins are more convenient to use than gold due to their lower intrinsic value, Zimbabwe seems determined to issue only gold. According to the state-affiliated Herald newspaper, 4,475 gold coins had been sold as of August 12. [1/10 Gold American Eagle] are due out in November.

Longtime Zimbabwean President Robert Mugabe was ousted by the military in favor of Emmerson Mnangagwa in 2017. Since then, Mnangagwa has struggled to revive the national economy plundered by the Mugabe government. While the circulation of gold coins may be a step in what Mnangagwa hopes is the right direction, a review of the RBZ is also underway.

On August 11, Ashok Chakravarti, a member of the RBZ’s monetary policy committee, announced: “The issue of the currency board is under consideration. This has been done by 40 countries, but it also requires a substantial amount of reserve funds. It is under study. »

If a currency board were established, the central bank would be required to back all national currency with US dollars, which in turn would maintain a fixed exchange rate. Chakravarti said he estimates it would require around US$700 million in reserves.

According to Rebecca Baldridge in a May 29, 2022 Investopedia.com report on currency boards, “A currency board is the monetary authority of a country that issues notes and coins. Unlike a central bank, however, a currency board is not the lender of last resort, nor what some call “the government’s bank.” A currency board can operate alone or work in parallel with a central bank, although the latter arrangement is rare.

Baldridge continues, “In conventional theory, a currency board issues into circulation local notes and coins that are anchored in a foreign currency (or commodity), called reserve currency…the exchange rate in a cash system issue is strictly fixed. ”

According to the International Monetary Fund website, “A currency board system can only be credible if the central bank holds sufficient official foreign exchange reserves to cover at least the entire narrow money supply. In this way, the financial markets and the general public can be assured that each invoice in national currency is backed by an equivalent amount in foreign currency in the official coffers.

In a letter published Aug. 20 in The Wall Street Journal Johns Hopkins University, Professor Steve H. Hanke wrote: “The first currency board was established in Mauritius in 1849. At their height there were more than 70 currency boards. Since 1849, there have been 711 scattered banking crises around the world. Only 16 occurred in countries with currency boards. Of more than 500 defaults on sovereign debt since 1849, only five have occurred in countries with currency boards.

Hanke continues: “In a study of 98 countries between 1950 and 1993, I found that inflation was almost five times higher in countries with central banks than in those with currency boards. If that’s not enough, there have been 61 episodes of hyperinflation around the world since 1849. All of them were produced by central banks, not currency boards.

Currency board systems anchoring their currencies to the European Union euro have already been put in place by Bosnia, Estonia and Lithuania. Argentina pegged its currency to the US dollar until 2002. Many Caribbean states still use currency boards.

Zimbabwe may be able to stabilize its battered dollar with a combination of locally issued gold coins and US dollars, but as Forex.com recently warned, “other governments around the world with much larger economies majors could take similar steps to promote gold as an alternative to US Dollars.The main ones are Russia and China.

Could Zimbabwe have opened a Pandora’s box, with cash pushing back against fiat money? Forex pointed out: “Despite now being locked out of Switzerland and other major financial centers, Russia is unlikely to be deterred from engaging in precious metals trading. It is a major producer of gold, platinum and palladium. Its central bank has been a major hoarder of gold. And since war-related sanctions were imposed, Russia has begun to require some of its trading partners to pay in rubles or gold rather than dollars or euros. The global monetary order may be refocusing heavily around gold.

Forex asked: “Will Zimbabwe become a model for adopting sound currency?” Probably not.” Maybe not, but it’s possible that Zimbabwe’s gold coins usher in a new world economic order, one in which cash trumps fiat money.

About Eleanor Blackburn

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