The Sunday Mail
Persistence Gwanyanya
The whole idea of the gold coins is to provide a viable alternative to the United States dollar as a store of value.
That is necessary to deal with inflation and currency depreciation which were being driven by the high demand for the US dollar.
The auction system has mainly been catering for the constituency that is in international trade. However, not all of us are in international trade and therefore have no access to the auction system.
Some of us may be having huge sums of local currency and we need to be catered for by having access to facilities that enable us to store value.
The question that many people have is clearly linked to the value of the gold coins with an initial value of one ounce.
There are those who are saying the gold coins are not accessible to everyone in the economy, they are accessible to those that have some significant Zimbabwean dollar balances.
So if one ounce is going for US$1 800-plus, how many of us can afford the gold coins?
Here is the answer, gold coins are a policy instrument that the Reserve Bank of Zimbabwe is using to mop up excess liquidity.
Given the structure of the economy where liquidity is in the hands of a few contractors, institutional investors and pension funds, there is need to mop up that liquidity from these institutions.
So, initially the target is, although there are no restrictions to anyone, those that have significant local currency balances.
But it is a starting point.
Although, some are saying there will be arbitrage, but we cannot just sit and watch because we are afraid.
Let me explain this issue of arbitrage.
As an economy, we are coming from a background of low-level confidence as a result of the journey that we travelled.
Having experienced hyperinflation, we need currency reforms that inspire confidence.
Because confidence levels are very low, we need an instrument that is very attractive for it to be subscribed to and the gold coins can do that.
We must understand what we call the transition mechanism.
This is whereby there is a gold rush from those with Zimbabwean dollar as you have started to see.
Even those who initially complained now want to be considered and have access to the gold coins.
So, the transition mechanism says the arbitrage is important to drive demand for the gold coins.
As you drive demand for the gold coins the Zimbabwean dollar strengthens.
We have started seeing that happening and the Zimbabwe dollar will continue strengthening as the Reserve Bank sucks liquidity from the market and from those with high volumes of the local currency.
In future, we may see the facility beginning to be more accommodating for those with smaller balances.
If that happens then the arbitrage is closed.
This strengthens the Zimbabwean dollar and it is happening at a time when the Ministry of Finance and Economic Development is taking measures to deal with contractors and other parties that have been getting lump payments and offloading those in the alternative markets.
The Ministry has intervened through a mix of US dollar and Zim dollar payments.
There will be a 50/50 payment proportion as an intervention from the Minister.
We have also seen the Ministry taking some serious measures at least to review its procurement processes.
We are being told that the Ministry has come up with a comprehensive review of the procurement processes where the contractors and suppliers have just been overcharging and now they will no longer be able to do that.
What does the new revised strategy mean?
It means that the capacity of those contractors and other drivers of exchange rate depreciation to offload huge sums of Zimbabwe dollars on the market will be curbed and their capacity to control the market restrained. So this is the processes which addresses questions of arbitrage.
People always view arbitrage as something that is continuous, they don’t factor in that the arbitrage itself is the reason for adjustment of the prices, of the exchange rate and therefore closure of the gap between the official and the parallel market exchange rate.
If you look at the midterm budget, what you can see is that we are coming from an environment of currency and price instability but also an environment of notable progress in the real sectors of the economy, such as construction where we have infrastructure projects.
What this simply tells you is that there is need to balance real sector growth with stability, that is the key message that comes out of that budget.
The gold coins are some of the measures that are supporting the stability I am talking about.There are also those who are saying Government’s aggressive infrastructure development programme should be toned down. However, these projects can be supported by value preservation instruments such as the gold coins.
It is ill-advised for Government to drop its projects because they have been driving instability.
What we need to do is manage growth and stability.
This will define the difference between a good and a bad policy maker, a good and a bad economic manager.
So the issues we are facing today are clearly management, we need to manage the constraints that confront us as an economy.
We are unable to access international markets for capital which is necessary for the appropriate funding of infrastructure development.
What is available are local resources, but we know what they do to stability, so what that means is we need to manage the possibility of using an inappropriate model for infrastructure development.
The midterm fiscal review also reflects the need for Government to review its procurement processes because if they don’t do that we will end up supporting the monopoly economy which is our major challenge today.
The liquidity management committee which comprises the Reserve Bank and the Ministry of Finance must have input in some of these things.
The Ministry officials indicated to me that they are reviewing the procurement processes, from as little as toilet paper there should be parameters and guidelines because the tendencies of overpricing Government are always high.
Those that are participating in the informal sector or the open market, what they want to call the parallel market, would only complete their cycle of arbitrage if they are dealing between themselves.
You can’t then realise the arbitrage opportunity if you are not playing in both markets, but if you are making the formal market more attractive that’s where the carrot is.
So the funds should flow from the informal sector to the formal sector for the next six months.
If this is achieved, it means the informal sector would start to shrink and we will start to see more stability.
If we have stability, it means that we are now able to drive real production.
But production levels have been up even in this unstable environment and this simply reflects the fact that there is an opportunity to create value.
Malls are opening up, there is a lot of housing development happening, and investors have seen beyond the current problems.
Investors know that at one point the economy will turn for better and the greatest part is the administration does not allow the looting of natural resources which will play a big role when the economy fully industrialise.
Persistence Gwanyanya is an economist and a member of the RBZ Monetary Policy Committee. He was speaking to The Sunday Mail’s Harmony Agere.
