President Mnangagwa apparently wants to shed his administration’s economic issues.

Zimbabwe’s plan to produce gold to fight inflation excites investors

Zimbabwe is going to make gold coins so that investors can store value in the country even though inflation is out of control and the value of the local currency is falling quickly against major currencies.

The move comes after inflation rose from 132 percent in May to 191.6 percent in June.

In a statement released on Monday, John Mangudya, the head of the central bank of the southern African country, said that the new gold coins would be available through regular banks.

“The Monetary Policy Committee (MPC) of the Reserve Bank of Zimbabwe decided to put gold coins on the market as a way for investors to store value,” Mangudya said. “Fidelity Gold Refineries (Private) Limited will make the gold coins, and they will be sold to the public through normal banking channels.”

The central bank owns Fidelity Gold Refineries (Private) Limited. It is the only company in the country that buys and refines gold.

The monetary policy committee of the central bank was “very concerned” about the recent rise in inflation, which went up by 30.7% from May to June 2022.

Authorities are working hard to pull Zimbabwe out of its economic crisis, which is marked by high inflation, a local currency that is losing value quickly, 90% unemployment, and a drop in manufacturing output.

Moving Markets

Inflation has been going up in the country for the past three months. This is because the Zimbabwean dollar is getting weaker and weaker and is now worth $1:650 on the black market.

The central bank has also made things worse by printing more money. This has undone the progress made in the past two years, when inflation went from a high of 800% in 2020 to 60% in January of this year.

As part of plans to stabilise the economy, the central bank will raise the interest rate from 50% to 100% per annum and more than triple the lending rate from 80% to 2000% per annum.

Victor Bhoroma, an independent economist in Harare, praised the actions of the central bank. He said that raising interest rates would cut down on “speculative borrowing in the economy” and “money supply growth.”

“Gold coins are a good way to keep your money safe. “If sold in Zim dollars, it can help ease pressure on the US dollar and keep inflation steady,” Bhoroma said. “But they will probably be indexed to the US dollar, which means it’s a way for the central bank to get USD from the market. So, the success will depend on how much people trust the central bank to sell the coins and back them up with guarantees.

He said that the market will continue to favour hard currency as long as confidence stays low.

A welcome development Investment analysts seem to like the idea of gold coins more and more.

Morgan & Co’s head of research, Batanai Matsika, said that the gold coin was a welcome addition to a market that was lacking investment options and will help investors protect themselves against inflation.

“There weren’t many investment options on the market for a long time, and this is a new asset class,” Matsika. “The idea came from the need to find a way to deal with the problems caused by inflation, which has made it harder for people to buy things. Based on what we know so far, this will be a store value.”

He said that there are some basic facts about gold that make it a good hedge against inflation and geopolitical risk. He also said that this idea wasn’t completely new.

Matsika said that the idea was taken from the Kruger rands. “It’s also a way to let everyday investors into the gold market. From the point of view of an investment advisor, it could be an interesting area. It might pay off in the end.”

Tatenda Mabhande, an economist at Akribos Capital in Harare, is hopeful that the gold coin will be able to act as a store of value.

“It’s a good thing that the coin can be used as a store of value, since the Zimbabwean dollar was losing its worth. “People wanted US dollars as a safe place to keep their money,” Mabhande said. “It will make the US dollar less stressed, but people will still want to buy USD. We don’t think the gold coin will help with fluctuations in exchange rates, though.”

He said that the gold coin was a way for the government to try to make people less interested in the US dollar.

“There will still be a need for dollars as long as Zimbabwe is a net importer,” he said. “Bad money will eventually drive good money out of the market. It’s likely that the coins will go away, too.”

Mabhande said that for the gold coins to work, people who want to buy them should be able to pay with Zimbabwe dollars instead of US dollars. This would get rid of the extra local currency that was floating around.

Mabhande also said that the central bank needs to make sure that the face value of the gold coin “is always greater than its intrinsic value” for it to be used as money and for investors to use it as an alternative to the US unit.

The new steps by the central bank come at a time when President Emmerson Mnangagwa, who has been in charge since November 2017, is said to be desperate to get rid of some of the economic problems that his administration inherited from the previous government.

Mnangagwa had said that he would announce more steps to stabilise the economy on Saturday. On Monday, the finance minister, Mthuli Ncube, announced a number of changes that will, among other things, raise the salaries of civil servants and raise the allowances of people in the health sector and schools.

Ncube also said that businesses and people in Zimbabwe were to blame for the collapse of the Zimbabwe dollar and the rise of inflation.

He told reporters in the capital that recent “econometric studies done by the University of Zimbabwe” supported his claims and that inflation was not caused by “normal real economic variables” but by “behavioural variables” like confidence and negative inflation expectations.

Ncube also made it illegal to lower prices for payments made in US dollars. He warned that people who did this would be prosecuted and have their business licences taken away.

Bhoroma said that the minister’s plans were nothing special.

“The Treasury statement didn’t say anything new, especially since the US dollar is already legal tender thanks to the Finance Act of 2009 and 2012,” he said. “The law to protect US dollar credit is a good thing that will give banks that get lines of credit to lend to businesses more stability and certainty.”

He said that getting rid of the diesel levy and cutting the fuel levy wouldn’t make much of a difference in the price of fuel in the country because prices in Zimbabwe were still “the highest in the SADC region,” which made local products hard to sell.

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