• Wed. Sep 27th, 2023

Thinking Out Loud – On SDRs and Gold Coins

ByEconomic Times

Sep 3, 2022

By Yona Banda

The Government of Zimbabwe through the Ministry of Finance and Economic Development recently sought to provide some clarity on the utilization of the Special Drawing Rights (SDRs) funds. The US$958 million windfall was received by the Government in August 2021 from the International Monetary Fund. The development was part of a wider initiative implemented by the IMF which saw the organization approve a general allocation SDR’s worth an equivalence of US$650 billion. Of that total amount, US$275 billion was earmarked for emerging and developing countries.

At the announcement of the initiative, IMF Managing Director Kristalina Georgiva narrated some of the reasoning behind the decision, saying “The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis.”

So, the IMF is providing funds to support the economic recovery for Covid-19 hit developing countries. Obviously, the needs of the suffering countries often stretch way beyond funding, with systemic issues such as economic and political management also key contributors to the malaise. It makes the allocation a more of a kind gesture than a rescue package for the developing economies.
Turning back the clock to August 2021, the Zimbabwean economy faced numerous Covid and non-Covid related issues. The social and economic cost of the COVID-19 pandemic cannot be understated and may take years to fully comprehend. But, they occurred in the context of an economy that was already fairly dysfunctional. Given the numerous social protection and infrastructure needs of Zimbabwe against the slow trickle of Foreign Direct Investment, dried up credit lines, and rapidly shrinking fiscal space, the US$958 million windfall could bring meaningful benefit to Zimbabwe. But with so many outstanding issues, from building up foreign reserves to more practical and tangible issues such as social protection, it won’t be enough to meet all needs.

From the disclosure, US$502 million (52%) of the funds were allocated towards reserves, which remain unutilized. A significant amount of US$144 million was allocated towards the construction of roads and other transport infrastructure. The government also allocated and spent US$167 million on social welfare of which US$77 million was spent on supporting Covid-19 vaccination programs and US$80 million was spent on an “Agricultural Productive Social Protection Scheme”. Overall, US$678 million (68%) of the funds had not yet been utilized at the time of the announcement. Expectations would have been for more allocations towards productive expenditures and pressing socioeconomic issues such as the state of the public health sector or the energy deficit. There is a strong case for the latter two, with the ‘22 revised fiscal budget expenditures for health and energy infrastructure now worth the estimated equivalent of US$43.3 million and US$13.3 million. 

The US$280 million allocation to foreign reserves is particularly interesting as it is the first mention of their existence in a while. At face value, it points to the apparent emphasis on stabilizing the ever troubled ZWL. As of late, much has been made of the apparent stabilizing effect of the Mosi-oa-Tunya gold-coin on the ZWL. As at 26 August the government reported the mint and sale of 10,000 of the coins. Reporting that 95% of the coins were purchased with the ZWL, with 75% of the buyers being corporates. This puts the value of the sales at somewhere near ZWL$10 billion.

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By implication from the apparent stability, that block of liquidity should comprise significantly of the “speculative arbitrage” funds that have been frequently blamed for driving the value loss of the ZWL. The question then becomes why the speculative arbitrageurs would so quickly change strategy to what is effectively a 180 day fixed deposit without the benefit of a guaranteed return. What is the attraction for the speculative arbitrageur? Will the gold coins be redeemed in the same currency they were purchased? Assuming the redemptions are in kind, the real yield earned by the ZWL paying coin holder will depend on the prevailing ZWL exchange rate, and the official exchange rate lining up with the parallel rate. Assuming the government will want to continue to exploit the facility in the future, possibly at a larger scale, then the incentive will be to ensure the coin holders are able to earn a positive yield (gold market price withstanding). In the event that the parallel rate depreciates significantly during the holding period and the official rate is allowed to follow, how will the government finance the redemptions in a non-inflationary way? Time will tell how the scenarios unfold – Harare

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