via Exploring mineral-based currency for Zim – Part 2 – The Zimbabwe Independent by Tapiwa Chizana October 11, 2013
In my previous article published in the first week of October 2013 on the above mentioned subject, I sought to inform the general public of the history of currency and the advantages and disadvantages of a mineral based currency for Zimbabwe.
The recent evaluation of the South African rand, US dollar and Euro has raised questions with respect to pegging our local currency against any another, and questioned the concept of being part of the rand monetary union.
I provoked the reader to arise from the trauma of hyperinflation and find the strength to engage in informed debate on the adoption of a “gold standard’ currency or equivalent for Zimbabwe in the future. I am in no way suggesting that the adoption of a local currency should happen anytime soon, but encourage readers to contribute to the debate, as this issue is of national interest.
I have received a number of enquiries from people proposing that I give some suggestions as to how this mineral based currency can be achieved. The absence of existing gold reserves and cash to purchase gold was highlighted as a major challenge faced by Zimbabwe in adopting a mineral based currency. For many people, that is a good enough reason to reject the mineral- based currency idea in totality. I disagree.
In as much as economic solutions and various alternatives cannot be thoroughly explored in a single article, the reality is that desperate times call for desperate measures.
Global economies are reeling from the consequences of their approach to their national currencies over the last few decades. Nations cannot do the same thing and expect a different result.
Zimbabwe needs to be willing to do adopt and de-politicise the implementation of pragmatic solutions to help us move forward as a nation. I would like to isolate one alternative that many have dismissed (too quickly) as impractical, to provoke us to further debate.
The option of securitising unexploited minerals (in the ground) to support the value of our currency has understandably been dismissed by many. It is interesting to note that a country’s currency system, on average, lasts less than 40 years. The point is that when it comes to currency policy formulation, it is normal to plan for a 50-year currency regime and be alive to the fact that it will most likely be re-assessed by the next generation. Our responsibility is to establish a policy that enables the next generation to have resources available from with which to work.
At the risk of being misunderstood, I seek to take you on a journey to explore this possibility. I ask that you patiently reflect on the following:
Technology is available within the global mining industry to estimate, to a reasonable level of accuracy, the mineral resources available within a specific geographical area.
Furthermore, the estimated cost of extracting minerals can be determined by experts after considering the expected investment in capital and operational expenditure over a period of time.
In an attempt to simplify the formula, the gross market value of minerals available in a designated area, less costs required to extract the minerals, can be determined as the “deemed value” of the minerals in the ground.
The government can designate the respective mineral-rich geographical areas as “currency zones”, which would not be exploited by private individuals or companies. For example, there could be zones designated, with reserves for the following minerals; gold, diamonds, platinum, Lithium, methane gas and uranium. There would still be sufficient mining areas outside of the currency zones on which private companies could mine profitably.
The government would then issue a local Zimbabwe currency equal to the deemed value of minerals in the designated zones. No more and no less. Such designation would be verified and certified by the African Development Bank or other international bodies. This would give the currency credibility and in effect enable the currency to be tradeable against the other world currencies on the international currency market.
Mining in the designated areas would only be permitted if the equivalent value of minerals extracted from those areas were to be deposited with the Central Bank, and retained as currency reserves. This would enable the country to slowly build up the required mineral reserves to support the currency.
If the government felt that it was important to increase money supply, then there would be a transparent process by which additional areas would need to be designated, for as long as the currency system exists.
The securitised claims could be sold at the deemed value or greater, under controlled conditions to private companies.
However the proceeds of such sale would have to be deposited with the Central Bank and form part of the currency reserves, supporting the currency in circulation.
The currency reserves would not be utilized for day to day government expenditure and a regulatory framework would be put in place to ensure that appropriate financial discipline is maintained. Regular verification and certification audits by the African development Bank or other international bodies would enhance the accountability and credibility of the currency system.
The use of a weighted average of diverse minerals would be important to mitigate against the effect of fluctuations in commodity prices, on the value of the currency.
The fear of “minerals running out” after say 100 years is understandable, but is not scientifically verified. Such fear should not cause inaction. If anything, the approach above is prudent and preserves value for future generations. One of the major shortcomings we have as a nation is that we have not invested in the appropriate infrastructure and technology to establish how much mineral wealth we possess. The pursuit of a mineral based currency should expedite and complement that process.
The implementation of such a currency system would apply pressure on individuals who are holding mining claims for speculative purposes and force them to actually exploit the resources. There would be greater support to those willing to mine profitably.
Allowing the mineral based currency to operate concurrently with the multicurrency system for a while, would allow a smooth transition over a period of time.
I am in no way suggesting that the above approach is the one and only option worth exploring. Neither do I claim that it is without challenges. I do however believe a mineral-based currency has a lot of merit for Zimbabwe. It will ensure that the next generation inherits a stable and resourceful economy.
Tapiwa Chizana is a Partner at Deloitte Chartered Accountants and writes in his personal capacity. Email: tapiwachizana@gmail.com
COMMENTS
Evaluation of mineral properties is a very expensive exercise. For instance Canadians have adopted the NI-43-103 standard which entails mining companies to conduct an intensive drilling program. A company might spend upwards of 10 million dollars just to evaluate one mineralised block. The billions of dollars spent on exploration would never be recoverable if those mineral properties are not turned into mining operations.
Your assertion is the same as saying lets have a currency based on our agricultural potential. Farmers would never produce enough to prop up currency. We saw how the agro bearer checks quickly collapsed.
Money would be better spent resuscitating the industry. Surely we can not have a country relying on importation of chicken backs, necks, gizzards and chicken feet. Who is enjoying the full chickens surely not Zimbabweans. Ko huku dzacho dziri kudyiwa kupi
It probably has merit, the problem is who is managing the economy and reserve bank. One of them should not even be allowed to serve tea
A bright well-argued preposition. Some of its “enemies” are mismanagement, corruption and political instability
A commodity backed (hard) currency for Zimbabwe is a good idea (along the lines of Bernard Lietaer’s ideas.) The quantity of money needed and, therefore, the quantity of reserves required, can be reduced by increasing the velocity of money. The best way to achieve this is to place a demurrage on all currency issued.
It might be an idea to also investigate the idea of complementary (soft) currencies, the use of which will help protect the hard currency.
If they got rid of the tea-servers at the ZRB it is possible. Zimbabwe could amass a gold bullion deposit and house it in an underground ‘Fort Knox’. There is plenty of gold to back a $ZIM and it could be one of the world’s most sought after currencies. Certainly the strongest, as was the USD before Tricky Dick Nixon, pulled a ‘Mugarbage’ and ruined the currency. Nixon removed the necessity for a $1 to be backed by $1 in GOLD.
Sorry a national economic which uses gold as a unit of account and a store of value, is not a viable idea.The global financial system uses fiat money for international and domestic transactions .Money is an artery which connects countries which make up the current international economic system and domestic markets of labour ,goods and money . In this arrangement trade settlements through international bank intermediations. Banks using globally positioned nostro accounts effect settlement transfers through a SWIFT global financial platform. All transactions are denominated in convertible currencies .Dont you think that there were practical reasons for the world to abandon first the gold standard ,which is your idea and later fixed or pegged exchange rates ? There is much more gold held by by various countries as reserves which can exceed projected global gold production in the coming ten years(my estimate). It is legitimate to debate whether or not the world should continue using the $US as a prime reserve currency ,if the debt of that country is approaching 17 trillion dollars .Certainly the US and other European countries do not represent prudent fiscal models. That said ,the US never forces any country or investor to buy US Treasury bills. This is the financial system which we have and time will come to replace it as was the case with some of the Bretton Woods institutions .It is not viable to conceive the world with a much expanded global GDP and international trade flows reverting to a commodity based exchange system .The growth of world trade will then be limited or expanded by stocks of gold held . Holding the fourth largest deposits of diamonds in the world does not translate in Zimbabwe being the fourth largest economy in the world .This has nothing to do with technicalities of potential asset valuations but with perceptions and confidence levels which the world has on a particular economy.
International currencies are also traded in global financial markets . The exchange rate or ratio of a national currency to that of its trading partners is determined by supply and demand factors in domestic and international markets . Valuation of relative exchange rates takes into account macroeconomic balances including fiscal performance ,interest rates ,level of debt stock ,interest payment burden and the healthy of both the current account (trade balances ) and the capital account balance ,which finances any trade account imbalances. The point to note is that Zimbabwe is part of an international financial system which enables the country to produce commodities goods and services in excess of its domestic requirements and to import from other countries what the country needs.Similarly savings made by nationals of other countries can transform into investments in Zimbabwe ,through international financial intermediation .Money serves three primary roles ,it is a store of value,a unit of account and a unit of exchange . Money is a fungible asset in its own country and and the international fungibility of a domestic currency is through currencies which serve as currencies for denominating international reserves.
There is nothing wrong Zimbabwe loading its balance sheet with gold reserves ,The fiscal efforts to achieve that goal will be no different from running a fiscal surplus unless the gold could be collected from a bush.In which case the value of gold would be determined by economic forces similar to those which determine the prices of mazhanje or amancimbi . There is no intention to deny that in the world there are commodity exchanges which take place as barter ,derivatives ,switch off ,buy back or futures hedges in the commodity markets . You can buy gold now for delivery in 36 months time at a current price . Mine operators have used forward sales to finance current working capital needs .They are very risky transactions ,speak to Ashanti Gold (Ghana).
Actual gold stocks held in the vaults of many national treasuries counts as one of the components of a country’s reserves.In case of a national financial distress ,gold the commodity, can be liquidated at market determined prices in order to to turn a commodity into liquid money . Minerals underground or proven reserves could have limited collateral value ,they can be used to transact monetary debt . Minerals underground are not a fungible asset and cannot have a monetary role ,but can be included in Company balance sheets. Knowledge of the quantum and value of proven natural resources is key in evaluating business risks associated with any natural resources extractive investments .
The volume world trade does not depend on the amount of gold held in international bank vaults ,it depends on the availability of appropriate financial instruments ,which are dependent on macroeconomic conditions of country’s whose currencies can be used as reserve assets .The Chinese Yuan ,still has limited convertability .Hence most of the Chinese investments are held in US$ denominated assets.
If all Zimbabweans were to withdraw their bank and corporate savings in order to buy gold and diamonds ,banking will be replaced by pawn shops ! Gold scripts might have a limited value in facilitating domestic financial transactions ,but will still be more complex than a multi currency regime.These scripts will be no different from fiat money ,except in their guaranteed convertability .If gold supplies become less than what is needed to transact goods and services ,zimbabwean gold prices would cause an inflationary spiral ,unless the central Bank imports bullion from elsewhere ,purchased through barter exchange or convertible currencies.How do you create bank loans or provide for domestic liquidity ? It is a normal monetary policy rule to allow banks to create credit from a given percentage of deposits.The latitude depends on whether monetary policy is on either a restrictive or expansionary mode . Hence paper money can be used to stimulate real sector investment expenditures.
Advocates of a Zimbabwean gold standard ,delinked from from an integrated global economic system are encouraged to think big about how to attract investments which can lead to increased minerals production .Think big also about formulating appropriate value addition strategies .Think big about having a sustainable fiscus ,low inflation and a sound banking system which can attract deposits and make prudent advances.In addition there is need for an efficient economic backbone support such as electricity ,transportation ,water and reticulation services. Fiscal support for health ,education and other services will be necessary . An appropriate mix of these things would enhance the productivity of Zimbabwe’s labour and capital far above current levels .With more gold reserves ,more productivity of invested assets ,more formal employment ,more tax revenues and maybe a Govt fiscal and trade surplus : you will well be on your way to re-introducing a fiat Zim dollar or whatever name . We do not have a population of more than 13 million and the GDP is in tens of billions ,please do not make complex a more desperate situation by creating a new indegenous financial and monetary system .Our resources ntural or created have a market value if they relate to other markets of labour ,goods and money . We need a soundly managed and competitive economy .The world’s second largest economy located in the East is very much alive to exigencies of savings ,controlled consumption ,price stability and competitiveness in national economic management . This feature is worthy of our look east policy .It will be most unfortunate if Zimbabwe were to fail to see in the East , these Chinese national economic management virtues ,including salary levels, which attract huge inflows of foreign investments .Who says a pitiburo cannot run a world class capitalist economy ? The Comrades are not about to create a rival global financial architecture ,they are strenghtening the existing system .Inspite of having reached a
global economic super league status ,the comrades are still very reticent about making the Chinese Yuan one of the convertible and international reserve currencies . Clearly the East is a source of great economic leadership wisdom ,let us Look in that direction ,without any hesitation.
The idea of using a mineral resource as the backing for a currency is not feasible. Proposing the idea shows the writer does not understand how a minerals inventory is calculated and the levels of confidence placed on the different categories of that inventory. As a member of an accounting firm of some standing, I would presume the writer has had experience in auditing mining firms and seen the difference between theoretical calls and actual returns in exploitaton of a mineral commodity. Such metals accounting is based on data with a high confidence limit, not a low confidence global assessment of a resource.
The backing of a currency with a commodity is an entirely different issue: that is an idea (the gold standard) from which the world moved away in the past (in the writer’s words, a previous generation’s currency system). It requires that the commodity be physically held to back the currency, not lying as an un-mined and theoritical quantity . As Zinyemba points out, minerals underground are not fungible, and using them is risky. It is a line of credit with an uncertain future.
The issue is whether the currency is redeemable. ‘Commodity currency’ usually refers to an article serving as a unit of currency that is made of a commodity e.g. a gold coin. ‘Commodity backed currency’, on the other hand, is scrip that is redeemable for a quantity or basket of quantities of various commodities.
The Islamic Republic of Iran was considering backing a unit of currency with future crude oil production. This idea could be extended to backing with future production of precious metals, provided that those reserves are proven.
Such a scheme would inspire greater confidence than the typical empty promise of a fiat currency.
It’s cute. I love the child like thinking. Bless you!!