Zimbabwe’s Plan to Fight Inflation

Zimbabwe’s plan to control inflation is by selling gold coins. According to the International Monetary Fund, they gave up the chance to build up their gold reserves.

During the summer, the central bank of Zimbabwe began to sell off its gold coins as a way to control inflation. The reasoning behind this is that gold would give the citizens another option over the U.S dollar.

The “Mosi-Oa-Tunya” gold coins have been popular. The name means “Smoke that Thunders” which refers to Victoria falls. These are 22-carat gold coins weighing one troy ounce. Within the first week of the coin’s release, the central bank sold 2,000 coins.

According to the latest prices reported on the central bank’s website, each gold coin currently sells for $1,800. Each one has a serial number. The prices are determined by the production costs and the international price of gold.

The coins could be purchased with the country’s currency and foreign currency including the U.S. dollar. Coin owners can convert them to cash or trade them in. Gold coins are also legal tender for financial transactions or used to secure a loan.

Due to the collapse of the Zimbabwe dollar, the intent is to reduce the demand for U.S. dollars.
Previously, Zimbabwe announced a plan to adopt the U.S. dollar as legal tender for the following five years to stabilize Zimbabwe’s exchange rate. This is the second time in 10 years that Zimbabwe is making the U.S. dollar legal tender.

Zimbabwe’s population is suffering from currency devaluation and inflation. The annual inflation rate rose 300% in August. Responding to the financial crisis, the country’s central bank raised its policy rate from 70% to 180%, setting a new record by more than doubling it.

However, the IMF sees this as giving up a chance to build up the country’s gold reserves. The selling of gold coins played a role in withdrawing the liquidity of the country’s dollar from the financial market. According to the IMF, for the Reserve Bank of Zimbabwe, it is an opportunity cost of reserves they gave up.

Earlier, the IMF pointed out that the country’s actions in its monetary policy were helping with the devaluation of the currency. Actions include containing budget deficits and tightening monetary policies, which are moves in a positive direction. These have helped in narrowing the gap in the parallel market exchange rates.

Because the one-ounce gold coins were so popular, Zimbabwe’s central bank is planning to release coins of one-tenth ounce.

This approach of selling gold coins also inspired the country to provide an incentive to Zimbabwe’s largest gold mining companies to produce more than the targets planned by the state.

The government is encouraging large mining companies to produce more gold. For the additional output, companies that exceed their target can receive 70% of the payment in foreign currency. The current payment arrangement is a 50/50 division between the local currency and foreign currency payments.

Zimbabwe has already increased its gold output by 38% this year. The 2023 target revenue for the whole mining industry is $10 billion. The government is expecting gold mining to bring in one-third of this revenue.