Exchange Rate Dynamics: Gift Mugano Unpacking Zimbabwe’s Gold-Backed Currency

Economist Professor Gift Mugano has demanded clarification on the connection between the Zimbabwe Gold (ZiG) currency and gold values in recent talks over Zimbabwe’s monetary policy.

This investigation is a result of the government’s urgent need to explain the intricate relationship between gold prices and the ZiG exchange rate. It is imperative to comprehend this link, particularly in light of the volatility of commodities and currencies alike.

Disparities that have surfaced since the Reserve Bank of Zimbabwe (RBZ) unveiled the ZiG in April 2024 are emphasized by Mugano. The first exchange rate was set at that time using a particular formula that connected the value of the currency to the price of gold.

When the RBZ introduced the ZiG, it fixed the value of ZiG1 at one milligram of gold, which was worth roughly $73.3 USD per gram. As a result, the original exchange rate was around ZiG13.64 to the US dollar.

According to Mugano’s calculations, the ZiG should potentially be adjusted to ZiG11.69 per US dollar as gold prices have skyrocketed to US$85.52 per gram. At ZiG25, the exchange rate is currently significantly higher.

This discrepancy calls into doubt the government’s stance on the value of currency. Economists contend that the market frequently loses faith in the currency when it observes such disparities.

Mugano exhorts the government to make amends for Finance Minister Mthuli Ncube’s remarks. The minister hinted at a discrepancy between the monetary policy framework of the Reserve Bank of Zimbabwe and the real dynamics of the market in remarks made at a recent press conference.

The public and investors may become confused about the currency’s stability as a result of this discrepancy. Ncube stressed that although the ZiG is backed by gold, the price of gold does not immediately affect the currency’s exchange rate.

He suggested that the government’s position is more about controlling expectations than it is about rigorously adhering to gold prices, pointing out that the central bank actively intervenes in the market to preserve liquidity.

Investor perceptions of the stability and dependability of the currency may be affected by this claim. The initial exchange rate would be set by a combination of the interbank exchange rate and the RBZ’s Monetary Policy Statement (MPS).

The MPS goes on to say that variations in inflation and the value of reserves held in precious minerals will determine future changes. The efficiency of a system like this is called into question by the policy framework.

It is impossible to ignore the relationship between the ZiG and gold prices, especially in an environment when inflation is out of control and interest in local currency is declining. As gold’s value rises on a worldwide scale, expectations for the ZiG ought to adjust accordingly.

Failure to do so could lead to economic instability, perhaps deterring foreign investment and damaging local confidence in the currency. Furthermore, it is estimated that the government now has just about US$370 million in foreign reserves, which is not enough to support a currency that is severely depreciating.

The central bank’s efforts to sell gold stockpiles for US dollars also raise concerns. This shows the Reserve Bank of Zimbabwe is dependent on gold sales rather than a stable currency system, even though it might momentarily ease liquidity concerns.

In the long run, this reliance can lead to more vulnerability. The government needs to be proactive in outlining its monetary strategy in order to steer clear of these rough seas.

Building public trust will require explaining the reasoning behind currency valuation adjustments and presenting a logical plan for coordinating the ZiG with gold prices. Mugano’s criticism is indicative of broader economic views in a country beset by difficulties.

Monetary policy clarity is not only required technically but also expected by the public. The people of Zimbabwe ought to be aware of how their currency functions in connection to one of the most sought-after commodities on the planet.

Zimbabwe needs a clear and consistent monetary policy, as evidenced by the current debate over the ZiG and its relationship to gold prices. This is crucial for preserving public confidence as well as long-term economic stability.

With the correct laws in place, Zimbabwe may start to more skilfully traverse its complicated economic terrain, guaranteeing a more promising financial future for its people.

The Zim Bulletin