Introduction
By the time I had reached 10 years old, one of my key duties in my mother’s home was replacing the plugs on appliances that had short-circuited or the fuse had blown up. It fascinated me how the plug worked properly and ensured that the appliances didn’t face damage during a surge of electricity (which regularly happened when electricity returned after a power cut), the wiring system as well as the fuse were all integral to the system. Twenty years later, it’s intriguing how the wiring system of a simple three-pin plug closely corresponds to how a nation’s monetary system functions. The Live wire which is usually Brown is the government, the neutral wire which is Blue is the banking system and the Earth wire is the green and yellow colored one which plays a role like the Central Bank. The fuse I imagine would be the people who when they feel the system isn’t working blow up and expect a re-configuration.
My analogy isn’t exact, but it is informative. Zimbabwe’s monetary system for the best part of two decades now, has been working like a three-pin plug that has a blown-up fuse and the earth wire (central bank) has malfunctioned to the extent that most of the appliances in the house aren’t working anymore and the roof is perpetually on fire. These are the circumstances that are facing the new Governor of the Reserve Bank of Zimbabwe (RBZ), John Mushayanhu. He announced the belated 2024 Monetary Policy which has the ‘structured currency’ as the core piece of his monetary policy. The currency is a re-configuration of the collapsing Zimbabwe Dollar which the Governor hopes to re-energize. As Minsky once said, ‘Anyone can create money, but the problem lies in getting it accepted.’ This article analyzes the latest monetary policy and weighs the chances of Zimbabwe’s structured currency becoming somewhat stable in the short to medium term weighing in heavily on the biggest dual factors that have led to the failure of previous currencies; political pressure induced by economic patronage and maintaining financial arbitrage opportunities for the military political elite.
The Structured currency, ‘ZiG’
The fundamentals of the new currency called ZIG (short for Zimbabwe Gold) functioning as a ‘structured currency’, have been widely reported and explained. It is a currency that is pegged to a specific exchange rate or currency basket and backed by a bundle of foreign exchange assets like gold. The ZiG is backed by RBZ reserve asset holdings constituting about US$100 million in cash and 2.5 tonnes of gold (worth US$185 million) combining to be worth $285 million worth of reserve assets enough to cover the new currency in the system currently valued at US 80-90 million which is between, about 3 and a half times worth of cover. As of now, at least 50% of corporate taxes will have to be paid in ZiG building up demand for the currency in the market. ZiG will be introduced with 1 ZiG, 2 ZiG, 5 ZiG, 10 ZiG, 20 ZiG, 50 ZiG, 100 ZiG and 200 ZiG which will be of good use from a divisibility standpoint supporting the chronic crisis of change during retail trading that has led to at least 5% loss of value for buyers ‘forced’ to buy goods that they didn’t necessarily want.
There are inherent risks that come with having a currency backed by resources such as gold. For example, Zimbabwe doesn’t control the international gold price, so the volatility of gold prices (although to be fair that shouldn’t be drastic) will mean constant re-working of the basket to ensure ZiG maintains good value. Other big questions include questions such as will the currency be able to buy products and services that are currently USD-only markets such as fuel? Will it be tradeable outside the country? Will ZiG remain as the Governor argued in his statement fully tradeable on the open market on a willing buyer, willing seller basis? The source of these answers is not necessarily monetary/economic, but profoundly political which I will explain further.
Inflation Targeting and Commandist Targeting
Since the 1980s, most central banks have committed their monetary policy to the idea of ‘inflation targeting.’ Inflation targeting is when a central bank seeks a specific annual rate of inflation for a country's economy (normally around 2% or 10% per year). The Reserve Bank of Zimbabwe has paid lip service to this idea drastically failing repeatedly. That is primarily because Zimbabwe doesn’t practice inflation targeting but works with ‘commandist targeting.’ Commandist targeting is derived from Zimbabwe’s military-political culture which works by controlling by force and repression, the nation's economic and financial tools for specific political patronage purposes that change from time to time to retain political power.
Zimbabwe’s political regime which is dually managed by ZANU-PF and the military has organized a patronage system since 2003 that places demands on government expenditure resulting in the use of the monetary policy as a tool to compensate for political debts through inflating the currency and preferential access to the monetary system. This is why monetary policy rather than following tried and tested inflation-targeting practices worldwide is constantly changing. Monetary policy becomes a tool for self-enrichment for the elite. The elite have been able to access arbitrage opportunities through access to cheap loans in ZWL, preferential access to the cheap foreign currency on the auction system, insolvent parastatals paying hefty board fees, funding of state trips with significant stipends and the purchasing of cars for ‘maChef.’
Ideally, high (hyper)inflation would have had a feedback loop into the political system during last year's elections and the incumbent government would have had their power reduced/lost. However, the political feedback loop has been short-circuited through defective elections creating a bypass where the average person is not central to the monetary system working anymore.
Relationship between State Treasury and the Reserve Bank
Since the commandist targeting policy runs the monetary policy in Zimbabwe, the relationship between the Treasury and the Reserve Bank which should function like an efficient three-pin plug with different roles to keep the system going, ends up functioning like a plug that only has a blue and brown wire; it works but it is very dangerous. The changing nature of relationships between government and central bankers is informative. During the tenures of Desmond Krogh (1980 – 1983), Kombo James Moyana (1983 – 1993) and Leonard Tsumba (1993 - June 2003), there was ‘restrained influence’ on the central bank from Treasury. Once the economic downturn took hold in the country, triggered by the land reform programme, that relationship changed as shown in quasi-fiscal activities carried out by Gideon Gono (2003-2013) and carried on during John Mangudya’s tenure (2014-2024).
One fundamental question for John Mushayavanhu’s tenure is how influential is he compared to the military-political alliance that has relied heavily on control and access to state finances and regular high inflation in the tenures of the previous central bank governors? Another one is simply why now? Why has the ZiG currency been introduced at this moment in Zimbabwe’s political journey? Possible explanations are that first of all, it is six months after the general election which they regained political power. Secondly, there has been a gradual weakening of opposition forces in the country. In essence, there is greater security of political tenure to ruffle the monetary feathers. Other analysts have already come out questioning the ability of the government not to inflate ZiG this year with the El-Nino induced drought expected to increase poverty levels. In response when questioned about this, Governor Mushayavanhu stated that he expected the Treasury to re-apportion the budget to meet the people’s immediate needs. Moreover, he said there would be no ‘quasi-fiscal activities’ under his watch arguing, “This is not an animal farm. Everyone will be treated the same. I am not going to entertain anyone coming to my office saying I am so and so,” and taking a leaf from the former Minister of Finance, Tendai Biti’s favorite clever fiscal remark, “We eat what we kill.”
President Mnangagwa also came out stating that he would not be running for a third term which would have caused for constitutional changes for him to run again. Based on the prevailing political climate, the military-political complex might be re-positioning themselves in expectation of long-term political stability meaning there could be less pressure on economic patronage allowing the new Governor to keep the currency stable in the medium term. Ultimately, nothing will change until Zimbabwe’s military-political elite find other means of maintaining power and apportioning wealth from the system that doesn’t require constant monetary changes.
Inflation expectation
The constant monetary alterations have resulted in Zimbabweans not trusting any local currency. This has led to the perennially high ‘inflation expectation’ phenomenon which is when people—consumers, businesses, investors—expect prices to rise very quickly in the future. To mitigate those fears, President Mnangagwa and Governor Mushayavanhu went on a publicity campaign showing the media, the gold in the vaults, trickling information to the public about the introduction of a structured currency before the monetary policy was announced. Some criticism was thrown towards this process because there was a lack of ‘stakeholder consultation’ with mainstream business and labour unions such as the Zimbabwe Congress of Trade Unions (ZCTU) who are now demanding a sit down with the Governor. Contrary to this though, consultations were most likely held with military-political elite through the President’s office, again showing where real power in Zimbabwe lies.
There have also been calls that there is a need for regular audits of the gold in the vaults by independent auditors, This would be noble but in effect, it would be performative because even if there is enough gold to back ZiG, if the Governor and powers that be are not willing to ‘defend’ the currency on the open market if/when it loses value, we will end up with the situation of ZiG’s predecessor. Market action by the Governor is more important than audits and showcasing of the gold. Moreover, an overused and misunderstood idea when it comes to currency is that of trusting government. The logic flows from previous monetary activities but when it comes to the strength of currencies, it is not trust that is the litmus test, it is central bank action. For example, the USD has continued to maintain its demand globally because the markets know that the Federal Reserve (through interest rate management) and the Treasury (through tax collection) will do whatever it takes to maintain the dominance and strength of the USD.
A clearer example is that of Russia. Under the authoritarian, oligarchic rule of Russia which is at war with Ukraine and under financial sanctions from the EU and USA, no one ‘trusts’ Russia. But Vladimir Putin and his central bank governor, Elvira Nabiullina have maintained the strength of the Russian currency, the Ruble, beyond most analysts’ expectations via capital controls, stringent money supply, and collection of taxes to ensure the government did not go broke. The Russian example is evidence that Zimbabwe with a dominant party, oligarchs, sanctions, and a military-political elite do not need to constantly fiddle with the currency creating more problems that solutions.
Conclusion
Mushayavanhu’s term in office is an opportunity for the government to re-calibrate the role of the monetary body in a way that serves their grip on power than the opposite. During the period before and after the 2023 elections, the exchange rate of the USD-ZWL was stagnant, evidence that they can stop printing if they feel it is in their interests to do so. The incoming Governor was wise to concede that the USD would remain the main currency in circulation with the local currency with a ratio of 80/20 because it serves the needs of the elite.
ZiG has a role in the economy, but that role needs to remain limited until such a time the military-political elite have found other avenues of maintaining their power without relying on constantly devaluing the currency through uncontrolled spending in Treasury and printing at the Reserve Bank. A failure to do so will lead to the issuance of another currency by Mushayavanhu. The Russian case study shows that monetary stability doesn’t need political legitimacy. However, like a three-pin plug without a working fuse, it is a delicate act that needs the rest of the wiring to play its part and not get involved with the other, or else the house will burn up in flames as has occurred in Zimbabwe’s periods of hyperinflation.