Financial literacy, support in gold-backed economy needed

Gold coin

THE central bank of Zimbabwe introduced gold tokens and digital gold tokens backed by gold in a bid to reduce pressure on demand for the United States (US) dollar and to stabilise the local currency.

The daily devaluing of the local currency poses great risk to incomes and welfares of many citizens, who are either civil servants or trade in the local currency.

In a bid to preserve value, the country is experiencing a high demand for the green back by masses, while alternatives ,such as the gold token and the digital gold token have witnessed slow uptake. This is largely owed to lack of confidence in formal financial systems and inadequate financial literacy.

A year after the launch of the gold coins, the country launched a complimentary gold-backed digital currency. This launch came with skeptical opinions from some of the country’s economists, academics, civil society organisations (CSOs) and the general public.

Following the continuous devaluation of the local currency even after introduction of the gold coin, the digital currency has inevitably inherited market force attitudes of previously failed currencies and financial economic measures.

It also goes without saying how exclusionary in nature gold coins and gold-backed digital tokens are perceived as they mostly cater for the well-to-do Zimbabweans, while the majority of the citizens grapple with hyperinflation, hunger, and poverty and cannot afford to purchase and participate in the trading of these alternative currencies.

This intensifies mistrust and lack of confidence by the public of the ability of local currencies to solve the country’s current financial crisis.

In Nigeria, the central bank launched its digital currency, the eNaira, in October 2021.

This digital currency still grapples with gaining usage momentum and relevance  as the public have shunned its anti-laundering measures and additional government control because while regarded as a legal tender, it is only backed by law and the full sovereignty of Nigeria.

Despite being one of the top 10 nations with the highest virtual currency usage, initial ambiguity around whether individuals were allowed to buy and sell the currency as well as the existence of stronger competition, such as the Bitcoin and Ethereum, the nature of the eNaira was not compatible with market demands.

The central bank of Ghana also developed its digital currency, the e-Cedes. However, due to  economic dislocation, the launch was postponed from 2022 to a time where inflation rates and currency value equilibrate.

The governor emphasised how inappropriate and inconducive the current macro-economic context is to launch any successful digital currency.

The mass population in Ghana is familiar with cryptocurrencies as at least 17.3% of adults, majority being youths, own digital currencies such as Dogecoin and Ethereum as assets. 

In principle, effective financial inclusion emphasises the need to develop financial systems in sound and stable economic environments where mass populations have unrestricted access and equally act as beneficiaries.

Moreover, there should be an establishment of financial literacy and inclusion programs, which mainly target vulnerable groups in the society such as the poor, youth, and women.

This, in essence, means delivery of financial tools and services must reach excluded populations through their community leaders and as such councilors and members of parliament have a critical role to play in ensuring that their wards and constituents are not left out of financial and economic activities.

The current nature of the gold coins and gold backed digital currency in Zimbabwe does not align with these principles as only a handful of the public are fully capable and aware of how to participate in purchasing the currency alternatives.

To date, a larger amount of gold coins have been purchased by corporates while individuals account for much less than ideal quantities.

Civil servants currently earn a 100% of their salaries in Zimdollars and the portion in US dollars is an only an allowance.

Due to the skyrocketing inflation and daily value loss of the Zimdollars , civil servants should ideally account for major gold and gold backed digital currency purchases as assets and income value preservation.

However, owing to lack of confidence and literacy in this financial arena, majority turn to theUS dollars. 

Zimbabwe has, over decades, taken pride in achieving high literacy rates, which currently sits at 90% making the country one of the most literate in the continent.

However, this does not automatically translate to financial literacy rates in the country.

Being largely informal, the country’s economy is cash based and currency preservation has been in forms of hoarding the US dollars and, owing to lack of confidence in formal financial systems, savings and investment platforms have been hard hit by the volatile economy, thereby making formal financial services ineffective in encouraging inclusive financial participation.

While Zimbabweans have increasingly shown interest in crypto currencies, such as Bitcoin, Ethereum, and others in order to diversify their portfolios, this financial platform remains high risk as it is not supported by a thorough regulatory framework and the average citizen lacks financial literacy and support in  exploring income and investment digital platforms.

The optimistic view of informal businesses implies that unless constraining policies, which result in high barriers to formal status and lack of capital, are reviewed there are less chances of informal firms registering to formality and enjoying productivity within the formal context.

However, the parasitic view of informality implies that part of the country’s economic turmoil is owed to avoidance of taxes and regulations by informal firms resulting in an increase in money laundering and fraud and an expansion of the cash economy.

It is against the backdrop of nature of informality that formalisation should be encouraged and adequately supported. The pursuit of formalisation inevitably attracts suitable financial services, encourages the establishment of financial literacy programmes, and resultantly a growth in mass participation in the formal economy and financial systems. 

The government plays a critical role in developing educational programmes on mutual benefits of formalisation, financial capital provision, and investment opportunities.

According to the financial literacy theories of financial inclusion, education that increases financial literacy of citizens also increases people’s willingness to join the formal financial sector.

Research suggests that, in developing economies, adoption of Central Bank Digital Currencies (CBDC) by consumers or end users requires greater effort due to the larger share of the informal sector.

Trading in the informal sector predominantly runs on anonymity, as a result of its illicit tax avoidance nature, while CBDC transfers and ownership are known and controlled by the government.

This disincentivises adoption of digital currencies.

It is of paramount importance that the government implements fair tax practices and favourable gold and gold-backed currency rates and policies as support to the public. 

The presence of gold backed digital currency also drives formalisation in the economy and as such a greater adoption rate implies formal economic growth.

The country’s weakening local currency exposes loopholes in adequate financial protection and support particularly for Zimdollars  earning employees and vulnerable communities.

Coupled with inherited attitudes of previous failed currencies, gold and digital gold tokens purchasing have witnessed dismal uptake by the mass population due to illiteracy and the unsuitable regulatory context.

In this largely informal economic environment, there is need for development of financial literacy programmes in educating citizens on the difference between the current gold backed currencies key success factors vis a vis previous currency performance.

Mass financial literacy programmes also aid in advocating for formalisation and participation in formal financial systems, provided that financial policies and systems are recalibrated in favour of the greater majority.

Jaravaza is a policy analyst and writes in her personal capacity.  These weekly New Horizon articles, published in the Zimbabwe Independent, are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — [email protected] or mobile: +263 772 382 852.

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