Zimbabwe May Build its Reserves to Back Currency Relaunch

(Bloomberg) -- Zimbabwe’s new president, Emmerson Mnangagwa, said his government is considering building reserves of gold and diamonds to back the eventual relaunch of the country’s own currency.

The nation abandoned the Zimbabwe dollar in February 2009 after an economic collapse saw inflation surge to about 500 billion percent, according to the International Monetary Fund, after exports slumped and international lenders had withdrawn lines of credit. This resulted in the central bank printing banknotes with a face value of 100 trillion Zimbabwe dollars.

“We had remained an isolated island,” Mnangagwa said. “This is the reason our currency collapsed, it became totally useless.”

While the adoption of the use of a basket of currencies dominated by the U.S. dollar in 2009 initially stabilized the economy it also meant that the nation ceded control of monetary policy. As the tender of neighbors such as South Africa and Zambia depreciated Zimbabwe’s goods became uncompetitive and vulnerable to substitution by imports. That led to the collapse of many manufacturing businesses.

Cash Shortage

A crippling shortage of cash has led to the introduction of so-called bond notes in 2016. While the government says these are equal to the dollar they are not accepted by foreign suppliers.

Zimbabwe has the world’s second-biggest reserves of platinum after South Africa and also has deposits of chrome, gold, iron ore, coal and diamonds.

“We are a country that is endowed with minerals, like gold and so on. The one school of thought is that we must have 10 percent of our gold used to build our reserves and the same for diamonds,” Mnangagwa said in an interview in his office in the capital, Harare, last week. “We are trying our best to build our reserves and when we feel, yes, we are at a stage where can move on to having a currency, we will move on.”

Currently long queues form on the sidewalk outside bank branches in Harare as people are limited to withdrawing $40 a week either in hard currency or bond notes, depending on what’s available. Automated teller machines seldom work.

©2018 Bloomberg L.P.