The Reserve Bank of Zimbabwe embarked on a quest to tame down the run-away inflation (2021 was 98.55%, a 458.66% waning from 2020) via the ancient policy of issuing gold coins. Before the Southern African country can effectively choke down inflation using gold coins, the underlying causes of the current inflation rate has to be disembodied and scrutinized for an appropriate monetary policy measure to be implemented. Globally, the leading cause of inflation prior to the Russia-Ukraine crisis was the fact that the financial markets were awash with excess liquidity generated by the generous monetary policies of the leading central banks.
Via the Hot Money phenomenon, the excess liquidity in the U.S., Eurozone and the United Kingdom eventually found its way to EMEs in search higher yields. One particular example being South Africa, which happens to be the neighbour of Zimbabwe. Prior to the Covid19 pandemic, the Rand was gaining strongly against the dollar, trading at R13.92 per US$1.00. The Rand, (with the SARB maintaining an interest rate of 5% against 1.25%-1.5% of the Fed, 0% of the ECB prior to the pandemic) gained significantly during that period as the Federal Reserve maintained an expansionary monetary policy. As the Rand gained, this made its exports more expensive especially to its northern neighbour, Zimbabwe, which depends on South Africa for more than 40% of its consumer goods imports. This appreciation of the Rand added on to the domestic inflation in Zimbabwe.
Currently, the rand is trading around the R17.93 handle, but the Rand is expected to strengthen significantly to the extent of reaching R16.10 against the greenback in 1Q23 as the rainbow nation shakes-off the negative impact of pandemic and aggregate demand gains traction once again. Analysts at Societe Generale believe that the Rand will be the top performer amongst all the EMEs currencies outpacing the Brazilian real, which is currently trading at 5.190 BRL against the dollar and is inclined towards remaining flat against the dollar.
In 1H22, the Russia-Ukraine crisis erupted sending shockwaves across the commodities market as energy and grains prices soared on the international markets. Crude oil prices launched from a yearly average of $85/bbl. to hit a decades high price of $130bbl. as the predicament in Eastern Europe deteriorated. Economic sanctions against the aggressor proved to be a disingenuous tactic as supply chains become severed coupled with already straggled grains output in Ukraine, wheat prices wheeled. In Zimbabwe, bread prices prior to the crisis averaged US$1.00 a loaf, but currently averaging $1.80 a loaf. A typical cost push inflation illustration, which requires fiscal intervention to resolve not monetary policy, because monetary policy will not increase grain output in the Ukrainian fields or oil in the pipelines.
President Richard Nixon, back in 1971 signed off the gold standard and ushered in a dispensation of growth fueled by massive credit. Fiscal indiscipline followed as the world’s largest economy pumped liquidity into the economy over the proceeding decades. The ever-escalating inflation in the Southern African country of Zimbabwe can be attributed to the absence of stringent fiscal discipline. The imbalances between the government tax revenues and the wage bill requires special attention in order for the gold coins issuance to be effective in taming down inflation.
The Zimbabwean currency is neither fundamentally pegged to gold nor gold coins, which means that bullion cannot be precisely used to tame the value of the $ZWD. This might imply that the RBZ can mint unlimited amount of both its currency and the gold coins without achieving the intended effect of taming down inflation. Prior to the collapse Brenton Woods, central banks would create fiat currency equivalent to the amount of gold they hold as reserves, in that way inflation was always kept in check. Fiscal discipline was primarily the default position unless the central government was preparing to default on its debt obligations by borrowing more that it can repay without the necessary collateral which happened to be gold reserves.
