… so, is it a currency?

From the days of the Agro and Bearer Cheques to the bond notes and coins days, the Reserve Bank of Zimbabwe (RBZ) has never seized to bring something to the market, which is aimed to solve one crisis or another. Even after that period, the RTGS dollar followed before introducing the ZWL. If you thought that was the end, then you certainly underestimated the crisis that the Apex bank is trying to solve, the crisis got them to introduce the latest form of … I would have called it a currency, but being cognisant of the technicalities around it, let me call it an instrument to store value and conclude transactions.

Sometime in the middle of last year, the RBZ decided to put its credibility to the test by issuing some Gold Coins, which they called Mosi-oa-Tunya. The idea was to wipe out excess ZWL liquidity in the market through a 180-day vesting period, whilst also providing a return for the buyers of the coins. The idea initially got some backlash from other economists in the market. However, it appears the project was somewhat successful to the extent that smaller denominations of the coins were subsequently brought to the market.?

As if to build on the momentum of the Mosi-oa-Tunya coins, the Bank threw in the digital or virtual gold back tokens called Zimbabwe Gold (ZiG) early this year. Behold, I know what you are thinking… but we were told that the underlying gold will be kept at the Apex bank and an independent auditor will verify the adequacy of gold to back the ZiG at any given time. This virtual token was made even more accessible to economic agents, with a minimum required investment of US$10, local currency equivalent for individuals and US$500 for corporates.

To enhance its attractiveness, an added functionality is the peer-to-peer (P2P) transaction ability. In essence, the RBZ is anticipating that economic agents who wish to transact locally can be able to use the ZiG account, just like they do with Point of Sale (POS) machines and swipe cards. This got people asking the question, so, is it a currency?

Well, I will leave you that question to answer but certainly, the ZiG is said to have the functions of money which are store of value, medium of exchange, unit of account and standard of deferred payment. The ZiG will be denominated in units of gold and converted to either local or foreign currency at the point of transaction. It will be still subject to an Intermediated Money Transfer Tax (IMTT) but at half the tax of foreign currency transactions.

Individuals or corporates with physical gold could be able to redeem it into ZiG which will be credited to their accounts. Whether this functionality will be utilised or not is another issue, but we are told it is there. Another question that the market has is whether you will be able to make international payments using the ZiG. Well, by simply doing a quick math that the e-wallets are opened by local banks and this is not a ubiquitous product, you can conclude that it will be confined to our borders, however, the issuer will need to clarify that question.

Analyst’s Comment

Considering that the economy that effectively is still transacting in local currency continues to shrink by the day, the effectiveness of the tokens might be challenged. No doubt considering the depreciation of the local currency, an instrument that stores value will be noble, but I opine it would have been effective a year or two ago when the levels of dollarisation were lower than what they are right now. With less than 10% of investors in the coins being foreign currency investors, I don’t see more economic agents with exposure in US$ rushing for ZiG or even those with hard gold liquidating it to ZiG.

The credibility of the issuer continues to be an X-factor provided that the Apex bank has changed goalposts before, on instruments it issued, for example, the famous “1:1 gedye” on bond notes which was then reversed via the introduction of RTGS dollars. I see the Bank having to do more to convince the market that the ZiG is as good as advertised and installing confidence in the market.

There has been a trend by Central Banks across the world to issue what are called Central Bank Issued Digital Currencies (CBDC). CBDC are a fiat currency issued by the Central Bank and it appears to be a direct response to cryptocurrencies but giving the Bank control.? Although the ZiG doesn’t fall under the plain vanilla definition of CBDC at the moment, due to the gold backing, it could certainly be a step towards it.

The Bank might use ZiG as an experiment to pave the way for the introduction of a CBDC. The advantage that a CBDC will have over gold-backed currency is the ability to influence economic development via controlling the money supply, although it also poses the risk of abusing that functionality leading to inflation. CBDCs will also assist the bank in influencing savings if they are to be implemented at a wider scale. I am not sure if the Bank is currently thinking along the lines of CBDCs but this could be the opportunity to introduce one.

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