The Sunday Mail
IT seems the debate on the need to adopt a gold-backed currency is growing by the day.
There is a growing number of prominent market analysts who opine the abandonment of the gold standard in the 20th century is one of the worst mistakes in the history of currencies.
They point to the repeated occurrence of global financial crises, especially after the adoption of fiat or paper money, as evidence of this assertion.
The global financial crisis that started in the latter part of 2007 is one of the most recent and notable of such crises.
However, there is also a constituency that is strongly against the return to a gold standard due to the complexities associated with the use of gold-backed currencies.
The biggest source of discomfort with a gold-backed currency lies in volatility due to fluctuations in international gold prices.
As such, a gold-backed currency of choice should be able to vary minute to minute with changes in the prices of gold on the international market.
That is why electronic gold-backed currency is preferred to other currency forms.
Gold monetisation of paper currencies would result in complications as its value would have to be adjusted every time the price of gold changes.
However, electronic gold-backed currency adjustments will be done online, offering more transactional convenience to users.
A gold-backed electronic currency is entirely backed by gold rather than debt or other financial instruments.
This makes it the only currency in the world free of financial risk.
However, lack of financial risk does not absolve it from exchange rate risk.
As with any currency, the value of such a currency continually fluctuates relative to other currencies.
It can be argued that there are more benefits for such a unit of exchange in Zimbabwe.
This currency would be more preferred in the country today due to its ability to do cross-border transactions with ease.
An electronic gold-backed currency offers the advantage of immediate and irrevocable transfers from one account to another.
Importantly, this currency can be converted to national currencies easily.
The biggest attraction of an electronic-backed gold currency is that it benefits from the reputation of gold as a store of value and a preferred long-term investment, whilst benefiting from use of technology to ensure smooth transactions.
These two characteristics make it better than fiat money and other digital currencies.
There is a number of digital currencies in the world, but their usage is still limited due to lack of confidence in them.
Bitcoin is the world’s most widely used digital currency, but the traction that it gained was reversed by money laundering scandals that rocked the owners of this currency project.
It is reported that the currency system was used to facilitate criminal acts such as child pornography, credit card fraud, identity theft and investment fraud.
These criminal activities tend to repudiate the notion that the private sector would be a better custodian of currency than the government — which has high tendencies to manipulate the currency — to meet its political ends at the expense of the whole nation.
A number of digital currencies in the country such as Bitcoin are less favourable because they are hard for non-techies to understand.
With an electronic gold-backed currency, one simply needs his debit card to transact online and everywhere.
With the growing acceptance of electronic money in Zimbabwe, electronic based gold-backed currency can easily gain traction among her citizenry.
The ability to make cross-border transactions would be the biggest attraction of such a facility.
With the mounting foreign payment backlogs in the country, any currency system that is seen as easing the backlog would be most welcome.
With foreign payment backlogs dating as far back as a year at some banks, it has become very difficult to do business in Zimbabwe.
This situation has also aggravated the black market for currencies, where US dollar cash is trading for a premium of around 15 percent against the Real Time Gross Settlement (RTGS) and electronic money.
As long as the trade deficit in the country remains, it will be difficult to sustain an electronic gold currency as the country will lose gold to trading partners.
As long as exploration and mining of gold remains low, a gold-backed currency would be difficult to support.
This is why such a currency would need to be supported by the economic citizen concept.
This concept tries to monetise on its attraction on foreigners who seek citizenship in the country through exchanging citizenship for some level of investments say a minimum of US$100 000 over five years.
This amount would then be invested in gold to build the necessary reserves to support the currency.
As such, it will go a long way in unlocking trillions of dollars in underground gold.
The idea of economic citizenship will also answer the call from locals who complain about foreigners who have been flocking into the country to harvest the US dollar which is readily available in the country due to its usage as a transacting currency.
Some of these foreigners are running businesses such as restaurants, which have insignificant contribution to exports, GDP and employment creation.
Needless to mention the success of this currency initiative depends on Government’s willingness to work on hygiene factors such as clarity and consistency of investment policies, fighting corruption and improving the regulatory environment, all of which underscore the need to expedite the ease of doing business reforms.
Persistence Gwanyanya is and economist and banker. He heads the financial advisory portfolio of Zimbabwe Business and Arts Hub (ZBAH). He is also a member of the Zimbabwe Economics Society who writes in his personal capacity. Feedback: [email protected], Whatsapp on +263 773 030 691 or blog on percyconadvisory.com