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Business Reporter

THE Government will soon introduce a structured currency, announced by President Mnangagwa when he addressed the first Cabinet meeting in February this year. Authorities believe it will bring an end to currency volatility (depreciation) responsible for driving inflation.

Zimbabweans have unpleasant memories of the impact of inflation since the decade to 2008 when inflation peaked at 208 percent, according to the last official count that year. 

The International Monetary Fund estimated the rate to have climbed to 500 billion percent.

This was one of Zimbabwe’s worst economic experiences, as it wiped out all local currency savings and the value of pensions following years of hard work.

Zimbabwe is currently battling sustained inflation increases, which have made life difficult for both businesses and individuals in terms of planning and preserving the value of their earnings.

At a time when Zimbabwe has limited access to external lenders such as the International Monetary Fund, World Bank and African Development Bank, due to its arrears from previous loans, authorities have found it difficult to defend the local unit to preserve its value.

Foreign borrowings to finance the balance of payments would allow authorities to intervene in the market during periods of shortages or excess liquidity, helping to maintain the value of the local currency at the desired level.

Zimbabwe’s currency continues to be buffeted by various factors despite the country’s strong performance on the external sector front where foreign currency inflows totalled about US$11 million in 2023, better than many regional peers outside South Africa.

The economic embargo imposed on Harare by the US, especially the Zimbabwe Economic Recovery and Democracy Act, also means Zimbabwe can not access any concessional lending to support its economy, including the currency.

The law bars any American seconded to an international institution from approving commercial loans to Zimbabwe.

The sanctions have also criminalised any relations between international banks (including correspondent banks) and Zimbabwean entities, making it impossible for the country to secure any liquidity to support its economy.

President Mnangagwa recently announced plans by the Government to introduce the currency, which should bring durable stability to the exchange rate, which would put a lid on incessant inflation rises, given local currency prices react to exchange rate dynamics.

“The fiscal and monetary authorities will be implementing a raft of policy measures to arrest price increases, stabilise the foreign exchange rate, maintain the value of our currency and ultimately encourage service,” said President Mnangagwa.

“We shall soon be announcing the introduction of our structured currency.”

Measures to deal with volatility and inflation increases reflect the Government’s commitment to finding innovative and lasting solutions to the currency woes and improving the monetary system.

A structured currency is a form of monetary system designed to enhance stability and manage inflationary pressures.

The concept is borrowed from investment banking where structured products are created by banks and often combine two or more assets, and sometimes multiple asset classes, to create a product that pays out based on the performance of those underlying assets.

The structure of Zimbabwe’s currency, going by the limited data made available thus far, is highly expected to be tied to the price of, at least gold, an abundant mineral in Zimbabwe.

This means Zimbabwe will need to continue to build its gold reserves to support the currency and put in place a system to ensure the value of currency circulating at any given time is limited to the value of gold in reserve. 

A hard asset that preserves value would resolve one of the domestic currency’s biggest problems, confidence.

Depending on the efficacy of the structure, its value would track the movement in the price of gold on international markets, limiting its vulnerability to the price of bullion, a tested store of value globally.

Unlike traditional fiat currencies, which rely solely on Government regulation and central bank policies, a structured currency incorporates elements of both fiat and commodity-backed currencies. 

It combines the flexibility of fiat money with the intrinsic value and stability of commodities, such as gold or other precious metals. One notable example of a structured currency is the gold standard, which prevailed in several Western countries during the 19th and early 20th centuries. Under the gold standard, the value of a country’s currency was directly linked to a specific quantity of gold held in reserve by the central bank.

This arrangement provided a fixed exchange rate and limited the Governments’ ability to manipulate the money supply, thereby promoting price stability and confidence in the currency.

Finance, Economic Development and Investment Promotion Minister, Prof Mthuli Ncube said, “The idea going forward is to make sure that we manage the growth of liquidity which has a high correlation to money supply growth and inflation. The way to do that is to link the exchange rate to some hard asset such as gold,”

“To do that you have to have some sort of currency board type system in place where the growth of the domestic liquidity is constrained by the value of the asset that is backing the currency.” Currency boards are monetary authorities that issue notes and coins fully backed by foreign reserves, typically a stable foreign currency such as the US dollar. 

The concept originated in the British Empire in the 19th century, with the establishment of the Board of Commissioners of Currency in British Malaya in 1845.

These boards were popular in the 20th century, especially in colonial territories and newly independent countries seeking stability in their monetary systems. 

However, their popularity declined in the latter half of the 20th century as many countries opted for more flexible exchange rate regimes, such as managed floats or pegs.