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Zimbabwe Intends To Link The Exchange Rate To Hard Assets Including Gold

3 weeks agoMon, 12 Feb 2024 13:34:13 GMT
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Zimbabwe Intends To Link The Exchange Rate To Hard Assets Including Gold

Zimbabwe is taking steps to stabilise its local currency as it faces economic challenges. Finance Minister Mthuli Ncube recently announced plans to link the exchange rate of the Zimbabwean dollar to hard assets like gold and establish a currency board, Reuters reported. The Zimbabwean dollar has experienced a significant decline of around 40% since the beginning of the year due to factors such as increased foreign currency demand from civil servants receiving December bonuses and lower commodity prices affecting inflows.

President Emmerson Mnangagwa also stated recently, the government’s intention to introduce a “structured currency” without providing details, and the central bank governor confirmed that work is in progress. Minister Ncube explained that the aim is to manage liquidity growth, which is closely tied to money supply growth and inflation. By linking the exchange rate to a hard asset like gold, a currency board system would be implemented to limit the growth of domestic liquidity based on the value of the asset backing the currency.

Minister Ncube stated that further announcements regarding these measures will be made in the future, expressing confidence that they will provide a long-term solution to currency volatility. He said in a press briefing:

The idea going forward is to make sure that we manage the growth of liquidity which has a high correlation to money supply growth and inflation. The way to do that is to link the exchange rate to some hard asset such as gold.

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To do that you have to have some sort of currency board type system in place where the growth of the domestic liquidity is constrained by the value of the asset that is backing the currency.

Zimbabwe, still haunted by memories of hyperinflation during Robert Mugabe’s regime, relaunched its local currency in 2019 after a period of dollarisation. However, the currency rapidly lost value, leading authorities to reintroduce the use of foreign currencies in domestic transactions.

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