Yes I said it.
Zimbabwe should forego pursuing United States Dollars (USD) directly through exports of minerals but instead capacitate the Minerals Marketing Corporation of Zimbabwe (MMCZ), working alongside the Zimbabwe Stock Exchange (ZSE), to set up and run a locally based, Zimbabwe dollar denominated, Minerals Market Exchange (MME) for an open minerals trades.
Participants will be mineral producers, who are individuals and companies of a certain threshold, who will supply the mineral commodities being traded, along with other licensed actors, and the buyers/exporters. All trades thereupon will be denominated in the local Zimbabwe dollar (ZWL).
At that stage the Finance Minister should ditch the Reserve Bank of Zimbabwe USD Auction System and have all banks Bureau de Changes and Money Transfer Agencies in the country list on the reconstituted Victoria Falls Stock Exchange (VFEX) where they trade USD among themselves in a regulated but market force driven Clearing House system, for onward selling to their clients - who may or not want to make imports.
Finally, to tie this all up, the minister will need to license a Bullion Bank of Zimbabwe (BBZ), which, by virtue of being a bank, will be listed on VFEX, but also on the MME. The Mosi-Oa-Tunya gold coins only scratch the surface of what BBZ will do to mop up excess liquidity and provide non inflationary conduit for store of value, and non capital flight pathway for movement of wealth.
BBZ will participate in activities such as clearing, hedging, trading and vaulting of minerals and precious metals traded on MME, over and above producing and administering the gold coins, a function currently under the purview of the RBZ. This bank will also distribute the minerals, manage risks, finance and hedge for the sector while being an intermediary between lenders and borrowers, mineral buyers, sellers, and banks/financiers on the reconstituted VFEX as well as traders on the MME.
Additionally, BBZ can then move on to leverage its mineral reserves to issue International Treasury Bonds (or diaspora Bonds) to raise capital for a Zimbabwe Sovereign Wealth Fund (ZSWF) where it will split proceeds at a predetermined ratio, with part invested in international financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity funds or hedge funds globally. The other part will be invested only in big local projects and infrastructure.
Let me expand on these…
Instead of seeking USD through export proceeds from miners who use the invoice system and the RBZ CD1 forms to declare sales, Zimbabwe could, instead, empower the MMCZ. In collaboration with ZSE, finance ministry can set up and administer MME for open trade of commodities. Participants will include mineral producers (individuals, miners and businesses that supply the mineral commodities being exchanged), other licensed players, and buyers/exporters. Following then, all deals will be denominated in ZWL.
This will exponentially increase the demand for ZWL as all entities who need to purchase Zimbabwean minerals have to secure ZWL first. In due course, this will stabilise the exchange rate and ultimately have this rate come to equilibrium through market forces as these systems, in conjunction with each other, will aid market driven price discovery, and give true value to ZWL.
This will, ipso facto, also eradicate the parallel market, and terminate illegal externalisation of foreign currency (forex) as buyers will come in and liquidate their forex in local banks, who in turn can sell it via VFEX to other banks or their clients. Not the current way where exporters are expected, of their own volition, to remit forex to Reserve Bank of Zimbabwe (RBZ) via CD1 form reconciliation, who will in turn auction the forex to importers. The current method leaves large loop holes for forex earned through exports to be understated or kept outside the country or both.
I will explain on expanded processes of VFEX below, for now let us say here that international buyers will dispose of their foreign currency through their local bank of choice as they seek to secure ZWL and make purchases of minerals on MME.
This proposal is based on the following arguments:
Currently, companies are required to export all minerals through the state-owned MMCZ, except gold which must be sold to the Reserve Bank of Zimbabwe’s (RBZ) subsidiary Fidelity Printers and Refiners (FPR)1. This creates challenges such as low foreign currency retention requirements, smuggling, fuel shortages, forex externalisation and antiquated technology.
Zimbabwe has a highly diversified and rich mineral sector, with close to 40 different minerals, including gold, platinum group metals (PGM), chrome, coal, diamonds, and lithium. These will form a strong basis to sustain MME by volume and for longevity, while simultaneously feeding VFEX listed banks with enough foreign currency.
The mineral sector accounts for about 12 percent of the country’s gross domestic product (GDP) and has the potential to generate US$12 billion annually if these systems are set up well. That is a billion a month, about tenfold what is currently being auction by the RBZ.
By setting up a MME for open trades, Zimbabwe can overcome current system challenges and create a more transparent, competitive, and efficient market for its mineral resources. The incumbent and accompanying downstream benefits of having the world come to Zimbabwe and not the other way round can not be overemphasised.
The MME will allow mineral producers to sell their commodities directly to buyers/exporters at market prices, without intermediaries or restrictions, with all attendant taxes/royalties calculated directly and at source. The Zimbabwe Revenue Authority (ZIMRA) will complete the tax verification by compiling VFEX, MME and RBZ documents for accuracy and completeness at ports of exit as these minerals are exported.
The MME would also facilitate the use of the local currency (ZWL) for all transactions, reducing the dependence on USD and enhancing monetary stability.
The benefits of this proposal include:
- Increased revenue for the government from taxes and royalties on mineral exports.
- Increased foreign currency inflows for the RBZ from buyers/exporters who would need to purchase ZWL to participate in the MME.
- Increased investment and innovation in the mineral sector from improved access to capital and technology.
- Increased value addition and beneficiation of mineral resources from enhanced linkages with other sectors of the economy and indeed downstream economic benefits.
- Increased employment and income opportunities for local communities from increased mining activity and development.
- A base from which to launch Zimbabwe Sovereign Wealth Fund (ZSWF).
- Reduction in pilferage, leakages of both minerals and forex, and wild exchange rate fluctuations.
Zimbabwe's finance minister, in this set up, will be expected to license a Bullion Bank of Zimbabwe (BBZ), which, as a bank, will be listed not just on the VFEX, but also on the MME. BBZ will take part in clearing, hedging, trading, and vaulting of minerals and precious metals traded on MME. This bank will also distribute minerals, manage risks, finance and hedge the industry, and act as a go-between for lenders and borrowers, mineral buyers and sellers, banks/financiers on the VFEX, and traders on the MME.
Zimbabwe’s banking space is regulated by the Reserve Bank of Zimbabwe under the acts it administers, that is the Reserve Bank Act [Chapter 22:15], Building Societies Act [Chapter 24:02], Post Office Savings Bank Act [Chapter 24:10], and others including General Regulations and Statutory Gazettes. All these have no provision for a bullion bank, investment bank or sovereign fund administration, all which BBZ will solve.
BBZ may thus be morphed to suit the purposes of a bullion bank as well as functions of an Investment Bank with special mining licenses to execute tradition bullion operations and equally act as an investment bank, playing the role of a broker or financial adviser for large institutional clients including pension funds.
Besides taking care of international transactions for the nation BBZ could also take institutional investors who want to hedge against inflation and use their local currency
to buy gold. This is beyond just issuing the Mosi-Oa-Tunya gold coins.
These institutional clients can be either “Allocated Accounts” where they buy actual gold bars with specific serial numbers on the bars and walk away with depositor certificates for the vaulted gold (and pay attendant monthly service fees), or “Unallocated accounts”, where they buy Contract For Difference (CFD) gold from BBZ (with no service fees). Both these instruments could be made trade-able on MME.
Whether allocated or unallocated Depositor Certificates, the price the clients buy these gold/CFD certificates/Bonds will be MME derived which in turn is affected by global market prices so there would be little room for price manipulations by speculators. As with such, investors will tend to purchase these bonds because they are hedging, holding value, or opting for another secure and fungible currency other than the USD, reducing further the demand on the later.
Another service to be added to this model will be physical vaulting service for gold
Producers and/or sellers on the MME. Currently producers are not allowed to keep their gold and have to market it to the sole buyer, Fidelity Refineries, a division of RBZ, within 30 days where part
of the proceeds are paid in local currency.
Some gold producers have resorted to cutting work shifts to reduce production as they will be awaiting payments from previous deliveries to the RBZ and do not want to hold ZWL longer than they need to. Whatever the reasons, this inhibits maximum productivity.
Producers could now be allowed to vault their produce with BBZ whatever is not sold at MME. With a legal agreement in place with RBZ the vaulting service with see all producers extracting gold at maximum capacity, benefiting everyone in the process.
All these can be replicated across all strategic national minerals beyond gold, like diamonds, lithium, platinum group metals and others.
Lets us envisage a whole cycle where all these are implemented. Mineral buyers are coming to Zimbabwe and swopping their foreign currency at local banks in exchange for ZWL so as to make their ore purchases on the MME. Banks, will sell this foreign currency to each other, Bureau de Charges, and institutional players via VFEX where they are listed, or to smaller players, or importers, internally to their clients. ZIMRA will collect its dues at point of transaction, meaning for the first time the authority will be able to tax international buyers, not just local exporters, increasing the revenue base.
Producers, equally, are marketing on MME and getting paid in ZWL. Excess produce they vault at BBZ and hold bonds for it, which they can either trade, store or use as currency. For international retooling or other imports of their own they approach their bankers and transact, otherwise everything is denominated in ZWL. BBZ meanwhile is also trading on MME as well, but being listed on VFEX it will equally be trading its bonds, currencies and shares.
Furthermore, local banks will need to commute their RBZ stipulated reserves of US$ 30 million to gold, vaulted at BBZ. And they need to be monitored strongly to only “create” money by curating their loan-books according to further vaulted gold to avoid the recurring incident which has been a hallmark of the past years where they cause M3 money supply havoc when they lend out wantonly and beyond their capacity.
Eventually, ZSWF will need to be operationalised and the Diaspora Bond off of the back of it. I will write another article on this in the near future. Suffice to say here that BBZ will be expected to fund government delivering on projects and others large and complex transactions of national interest. On the local level the bank will be have a “Venture Incubator” division which will provide Asset Financing, Retooling Provision, Venture Capital Funds, Trade Credit Providers, Supply Chain Financing,
Peer-to-peer Lending et al.
Running this cycle fully and efficiently severely depletes the need for USD to only barest of unavoidable imports. Otherwise the ZWL will become in demand within and outside the Zimbabwean boarders. With that will bring stability to the Zimbabwe economy where up to 30% of inflation is calculated as being imported, and 30% more is derived from the forex parallel market operations as the country has a huge appetite for USD, if not to import or to transact then to store value.
This set up can be implemented wholly, or not at all. It is a critical ecosystem where one facet needs the other. For instance we can not ask exporters to receive their payments in ZWL but have no VFEX bank set up where they can amortise their ZWL for USD whenever they need. Or, Ask buyers to deposit their forex with local banks when MME is not properly set up, or even keep the Forex Auction running as it will distort the exchange rate, as is currently obtaining. etc. This may create mayhem much worse than the 2008 scenario.
However, if implemented in its entirety, not only will this model see Zimbabwe stabilise economically and relegate macro-economic challenges to the past for good, but also see the national build substantial reserves in cash and commodities as well as improve infrastructure internally while growing a sovereign fun externally.
I would like to here your comments on this proposal. We can add or deduct on it before presenting a fully worked out document to Zimbabwe’s Minister of Finance, Professor Mthuli Ncube.