By Dr Admire Maparadza Dube
The Mosi-oa-Tunya gold coins were made available for purchase by entities and the general public on Monday 25 July. The opening day price for each coin was US$1,823 or Z$805,000, reflective of the Willing Buyer Willing Seller (WBWS) exchange rate being applied in conversion.
Speculation has been rife on what effect these coins will have on overall performance of the economy; so, is the fact that 2000 coins were put for sale on open day. It’s natural to cogitate on how many more coins are to be introduced to market as to have a desired effect but the authorities are yet to announce those numbers.
To borrow from colloquial lingo, is the mathematics balancing?
First, I’ll have to recap here on the most likely dynamics behind the introduction of the coins in the first place, as I have in previous articles.
Zimbabwe is in debt to the tune of US$20 billion, give or take (70% to 80% of Gross Domestic Product). At present, lines of credit from traditional lenders, like the Bretton Woods institutions, have dried up. The present government decided to fund infrastructure and agriculture from internal resources.
These “internal resources” included leveraging mineral exports as well as seigniorage, which is the temporal expansion of money supply (M3) to cover a need.
After M3 growth, import savings – like in the case of funding power stations to dispense with importing electricity – or increased local productivity, like in the form of toll collections from new roads, were supposed to recover the M3 back to desirable levels.
Through a combination of poor grain produced last season, with wheat being the exception, longer infrastructure projects delivery times, a downturn in the global economy because of Covid-19 and the Ukraine war as well as a static to negative population growth, according to preliminary ZimStat findings, all these proved detrimental to productivity and thus the envisaged self-correction of M3 was not realised.
This has left a huge money supply disproportionate to the country’s US$26 billion Gross Domestic Product (GDP).
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Too much too soon
It is imperative to note that the Zimbabwe authorities have to shoulder a lot of responsibility here too as they, firstly, injected too much liquidity too soon into the economy.
In the last presented national budget, capital expenditures for “national projects” accounts for a considerable chunk of total spending; Z$334 billion to be precise. That was 34.5% of the budget. The agriculture sector was allocated 12% of the overall budget, or around Z$116. billion.
Thus, 46.5%, or about Z$450 billion, of expenditure allocation went to just these sectors in a single financial year. This added to an already growing liquidity position where the new Zimbabwe dollar was introduced three years ago with Z$10 billion in circulation and currently there is a reported Z$1 trillion in circulation. A 100-fold increase in roughly 30 months!
Mathematics is rigid; numbers don’t lie. Since finance is based on maths then it equally becomes straight jacketed. This liquidity was giving the authorities headaches as entities began distorting market forces in rent seeking activities, like pushing up house prices as this money found its way to real estate to conserve value.
Also, it flowed to the parallel market where economic players endeavoured to convert their receipts into internationally accepted United States Dollars. This caused the exchange rate to sky rocket to the unmanageable 1:900
Then secondly, the authorities seem to have absconded from their banks monitoring task as in that very same period commercial banks “created” close to 85% of all M1 local money supply. M1 money supply is composed of currency, demand deposits, other liquid deposits – which includes savings deposits and, in this particular case, it was through their loan books and other instruments.
When one uses the RBZ exchange rates, subtracts USD from M3, and then calculates the ratio of local bank loans to local M3, one finds that commercial banks have “printed” over 85% of all M1 local Z$ in circulation in the previous 30 months.
This is estimated to be an unsustainable 50 times growth! For reference, during the same time global money supply has gone up by just 0.5%. The numbers did not add up and thus the abrupt decision to ban banks from issuing out loans. Of course this was temporary and, within10 days, the ban was rescinded.
Will gold coins succeed?
Enter the Mosi-Oa-Tunya gold coins. What is the mathematics around these? Will they succeed?
These coins have a liquid asset status, prescribed asset status, tradable and have collateral acceptability. Each coin will have a troy ounce weight, meaning it will not be in general
circulation for normal everyday transactions with each coin valued at around USD1,800.
Thus they are perfect for high value transactions and with a purity of 22 carats, individual serial numbers and backed by a certificate, they look poised to be custom fit as a store of value since they can be bought using Z$ (at WBWS exchange rates).
A troy ounce weighs precisely 31.1034768 grammes. The RBZ is expressing the weight of the coin in troy ounces rather than metric grammes used in the country since that is a widely used unit of measurement in the gold industry globally, and has been for more than 500 years. We can tell right away that they are following international standards since they want these coins to be traded-able abroad.
Let’s digress and enter the realm of speculation here. Most infrastructure/projects contractors are international corporations. They are paid in Z$ but they can’t take the Zimbabwean currency back to their motherland and so they do the sensible thing and exchange it for USD.
The problem for them is that doing so on the parallel market is illegal and the official market is starved of US$. The little that is there is allocated by the central bank on priority basis.
Could these gold coins then be an outlet designed specifically for this segment?
That is neither here nor there. The point is institutional players like insurers, pension funds, mutual funds are as much receiving, and seating on, hordes of Z$ in the form of contributions or from their investments and thus will equally benefit from having gold coins as an option for store of value. As for the parallel market, it is anticipated that it will starve of both the Z$ and US$ and hence the rate may fall.
All this may explain why the authorities chose not to chase the parallel market rate in their pricing of gold coins. Some analysts kept emphasising on that 50% premium currently obtainable in the coins because of the rate disparity of the parallel market and the WBWS rate. But rates, as we know, are a moving target and hence with proper intervention they may shift accordingly. Mathematics dictates.
Merging official and black market rates
The safeguards for purchasing the Mosi-Oa-Tunya gold coins include that buyers are subjected to through “know-your-customer” procedure to ascertain source and audit trail of funds. Purchasers must provide bank statements to prove they had the money on hand. This is because the government only wants genuine buyers, not those who would borrow money then engage in arbitrage activities or foreign players trying to launder their loot.
Furthermore, the coins have a 6 month moratorium period from date of purchase during which one cannot trade the coins. The authorities spoke of “fostering a culture of saving” but it is not hard to surmise they calculated that within that period the official and unofficial rates will have merged enough to eliminate arbitrage exploitation.
Also this prevents multiple “spinning” of the coins in the meantime i.e. buying the coins in local currency and selling in hard currency at black market rates. Numbers will tell, in due course, if they were right.
What does mathematics tell us on whether these coins will succeed?
Each Mosi-Oa-Tunya gold coin is worth US$1 823.80 and using the WBWS rate of US$1:Z$441.79 on the day of issue we get Z$805 745.35 as the cost in local currency for each coin.
The Reserve bank of Zimbabwe (RBZ) announced that they have so far released 2,000 coins. These coins will mop up Z$1 611 490 700.00 (Z$1.6 bn). As expounded above, RBZ needs to extract liquidity of around Z$400 billion from the market, with the remaining liquidity after that manageable by “open market operations”.
Z$400 billion at 25 July 2022 WBWS rate (date of coins issue) calculates to 496,435 gold coins. As such the 2,000 disbursed thus far is a pittance! Calculating further and using that 6-month period as a target we realise that to meet that coin number target for Z$400 billion then the central bank must introduce 19,094 coins a week!
Perchance they are negotiating behind the scenes with economic players seating on large volumes of cash who then won’t necessarily need to queue up like the rest of us lesser souls to procure the coins, or some other such arrangements. Otherwise the numbers will not add up and the coins will fail.
Not enough gold reserves
Also, ominously, the central bank does not have any noteworthy gold reserves to mint these coins. This necessarily means it is minting what it purchases from gold producers. The arrangement between the RBZ and its former division Fidelity Printers, which has now been privatised, is a story for another day.
The number of coins mentioned above adds up to about 15.6 metric tonnes of pure gold. That is precisely half the whole exported tonnage of gold for last year, 2021. That this tonnage has to be raised in those 6 months means, technically, all the gold being produced in the country at any one time will have to go to gold coins only, leaving nothing for export. For our highest foreign currency earner as a nation; how feasible is this?
That can only mean they are projecting to stabilise the economy and bring back confidence enough to bring down exchange rates, and with that, the demand and need to swop Z$ for US$. They are not chasing the whole Z$400 billion after all.
In any case it becomes counterproductive to incur an opportunity cost of earning hard currency from exporting that gold and instead minting it into coins to mop up liquidity. Purchasing 15.6 metric tonnes of gold from producers at the prevailing 80:20 split of US$ and Z$ respectively will mean the RBZ will have to raid the Foreign Currency Auction System of US$26.5 million each week for those 6 months just to cover the 80% forex component to producers. Yet we all know the “auction” disperses about US$25 million weekly for all national competing needs.
So the mathematics shuts this as an option. Leastways, the 20% Z$ component of that gold purchase reintroduces into an already liquid market a further Z$76 billion in those 6 months which exacerbates the situation.
My humble submission is that, as a nation without external funding, we definitely needed to look inward to fund same. Did we have to do that much that soon? Perhaps not, but we all know what socio-political pressure does to financial decisions.
Will the gold coins work? Not on their own and the market has to be pliable and play ball. Confidence has to return especially to big players seating on those large amounts of Z$.
Likely, overtures to them have been made behind the scenes already, which explains why the central bank is not going all out on a campaign blitz to conscientize the masses, just giving out periodic press briefs.
We are not the prime target. After all, how many among us can spare US$ 1 823.80 without a growth guarantee for a period of 6 months on a single Mosi-Oa-Tunya coin? Thus, if the “big players” are agreeable and believe in the vision then the gold coin will prevail. Otherwise the mathematics is screaming a different story.
Dr Admire Maparadza Dube Is a Finance Analyst with 20 years’ experience in this sector covering Wealth Funds, News Agencies, Banks and a Tax Authority in four countries spread over three continents. Views stated herein are his own and he can been reached on firstname.lastname@example.org