Exploring mineral-based currency for Zim

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

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