The ZiG is a backed, not baked currency

By Prosper Munyedza | Oct. 31, 2024 | 7 Min read

Reserve Bank of Zimbabwe governor John Mushayavanhu, at the time of introducing the currency, categorically stated that the ZiG would be backed by some foreign currencies, gold and other precious minerals.

EMOTIONS aside, allow me to analyse the good, the bad and the in-between of the country’s domestic currency, the Zimbabwe Gold (ZiG).

The ZiG was introduced, as a structured currency, in April 2024.

The key phrase that some local transacting public and commentators, either forgot or elected to discard and replace with one more desirable to their ears and narratives is “backed by”.

Copious debates have revolved around that phrase and its unadulterated implications.

If a currency is backed by something, that means it is supported or buttressed or propped or held up by whatever it is that would have been said to be shoring it up.

Unrestrainedly, tempers have flared, fists wildly exchanged and angry grimaces bartered between and among those who feel that the monetary authorities intended to say or actually said that the ZiG would be pegged to the price of gold, either before or during or after they pronounced that it would be backed by currencies and precious metals.

Unfortunately, for protagonists of this view, none particularly recalls the central bank governor specifically stating that the value of the ZiG would be pegged to the price of gold.

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If such a statement was uttered, logically that ought to have been followed by a judicious disclosure of the assortment of precious metals and currencies that would be backing the ZiG.

Granted, happen to be among its backers, why wasn’t a requisite algorithm (to determine the value of the ZiG from time to time) disclosed at its launch or thereafter?

With composite backing, ratios of the respective valuations of the constituent parts of the ZiG’s backers would be required to determine the exchange rate of the ZiG.

Prices of precious metals and values of currencies do not always move in tandem.

The price of gold, for instance, may rise while that of currencies is falling.

If the currency backing up the ZiG was strictly United States (US) dollars, were the price of gold to rise sharply while, concurrently, that of US dollars significantly fell, expectations of the value of the ZiG tracking that of the contents of the basket of currencies and commodities (pegged to those items) would necessitate computations to ascertain the impact of the respective magnitudes (based on the composition ratios) of the respective rise and fall of the constituent elements of the assorted support basket to determine the value of the ZiG at any given time.

It would not be a simplistic matter of merely looking up the price of gold on precious metals’ market ticker tapes followed by proclaiming that gold price would be the value of a ZiG.

When the ZiG was launched, what I observed was that a base value for ZiG was established.

The prevailing gold price was deemed the base value of the ZiG.

That announcement of the base value could have led to some in the public concluding that re-basing of the value of ZiG would automatically track movements in the price of gold.

“Backing of a currency” on its own, that is, without concurrently stipulating pegging to a certain currency or metal is not necessarily synonymous with pegging a currency to its backers.

There was need for clarity on that point as soon as the potential miscommunication was detected to ensure preservation of trust!

Money, among other functions, serves as a store of value.

If a currency’s value is generally unstable, the transacting public will be filled with trepidation whenever the prospect of having such currency landing on their laps and staying there for a considerable length of time presents itself.

Under such a scenario, economic agents’ rational desire would be to promptly offload such currency soon after receiving it or even eschewing it like the plague.

If economic agents have no reasonable assurance that the value of a currency, at the time of inserting a wand of notes thereof into their pockets or wallets would reasonably be expected to remain stable at the time of pulling out such a wand for whatever legal exchange purpose a few days or weeks or months after the initiating act, the economic agents would be incentivised to work towards converting such holdings into something else that could preserve value.

Often, in an environment with multiple currencies, the currency whose value is perceived to be unstable would be dumped.

In the prevailing environment, more of the ZiG always ends up on the market (official and parallel) hunting for stable currencies, hence causing the price of ZiG to deteriorate.

Such value depletion causes the transacting public to lose faith in the ZiG’s potency and stability.

Fiat currency is made up of mere paper and minted coins whose intrinsic value is miniscule compared to the value they represent.

Backed currency, though not fiat in nature, could end up being deemed fiat currency in the minds of the transacting public due to the public’s inability to decrypt the difference as well as the difficulty associated with individually ascertaining and convincing themselves of the veracity of the pronouncement that a currency is not merely fiat money.

Much of the uncertainty in the market is being occasioned by certain undisclosed crucial information about the ZiG ab initio (from the beginning).

One such piece of information that could dispel deleterious grapevine-conceived and sponsored misinformation is disclosure of the composition of the assorted mix of ZiG’s backers.

That is: What proportion of the basket is made up of gold?

How about other precious metals and currencies?

Disclosure of the split (ratio) could enable those keen to and with requisite mathematical abilities to determine the magnitude of any swing (fluctuations) in value that could result whenever the backer’s respective values change to do so reasonably accurately to avoid yet another layer of potential misinformation from incorrect analysis.

The central bank should endeavour to dispel disinformation unfounded rumours as well as to minimise ambiguity in pronouncements.

Scant information creates a vacuum which breeds the grapevine.

Professor Macleans Mzumara in his book Money and Banking says central banks ought to engage transacting publics to cultivate their trust.

If there was tergiversation in the form of evasive or ambiguous language in any of the central bank’s disclosures, then the public could have sincerely misinterpreted backing of the ZiG as implying pegging of its value to gold prices.

That would imply that the ZiG notes would essentially be serving as tokens for gold stored in a vault.

If that was the case, an interesting question to those who were so misinformed is: Why was there no outcry from non-tracking of the price of gold prior to the near 43% re-basing of the currency’s value?

The ZiG has largely not endeared itself to the transacting publics mainly due to trust issues.

Exclusionary policies that decree fuel retailers and the passport issuing office as being secluded from accepting the ZiG as legal tender generally leave rational economic agents doubting the potency of the ZiG and its value preservation ability is left perched in a precarious state in the minds of the transacting public.

If all sectors and transactions were ZiGised (I took the liberty to create my own word here), then it would not have been that hard to foster belief that the ZiG was indeed fabulous!

Excellent quality usually signals high value.

High quality, among other things, tends to give assurances of staying power compared to what low quality does.

Though it may appear trivial to some policy makers, the quality of paper used in currency notes subtly sends powerful signals on perceived intentions of issuers about anticipated period of circulation of a currency issue.

Hard-wearing high quality paper appears to signal anticipated higher velocity of circulation as well as indirectly sending a message that the issuing authorities believe that such currency notes are anticipated to be in use for a protracted period of time.

Fast-wearing shoddy quality paper inadvertently signals perceived issuing authorities’ disbelief that the currency denomination would last long after being ravaged by inflation.

That is what the uninformed generally decipher from the quality of paper used in currency notes.

The informed, however, may know that the intention could be to that of frequently removing and replacing the notes that would have become badly worn out as to obliterate security features on them while saving on cost.

Behavioural economists say economic agents act rationally.

If economic agents think that issuers of a currency believe it has no lasting power, then they too would share the same belief.

Prosper Munyedza is a Chevener who holds a MSc in Business Analysis & Finance and a BSc in Economics (Hon) degrees with University of Leicester and University of Zimbabwe, respectively, inter alia. He writes here in his personal capacity. He can be contacted on [email protected].