Why Zimbabwe¡¯s Launch Of Gold-Backed Digital Currency Has Sparked Fears Among Economists

Earlier this week, the African nation of Zimbabwe launched a gold-backed digital currency at a time when the country¡¯s currency continues to weaken against major currencies.

This move comes nearly a year after Zimbabwe launched gold coins last June in another attempt to stabilise its currency. But that too could not slow down the rapid devaluation of the Zimbabwean currency against the US and other major currencies.

The Zimbabwean dollar is currently trading at more than $2,000 for $1. It was trading around $1US: $650 on the black market in June last year, when the gold coins were introduced, as per the Al Jazeera report.

Zimbabwe's Gold-Backed Digital Currency

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And now this recent move to introduce gold-backed digital currency is the African nation¡¯s latest attempt to stabilise and strengthen its currency.

¡°Holders of physical gold coins, at their discretion, will be able to exchange or convert, through the banking system¡­ into gold-backed digital tokens,¡± the Reserve Bank of Zimbabwe said in a statement. It invites individuals and corporate entities to use the digital currency, which can be bought either in Zimbabwean dollars or foreign currency.

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The African country now joins Nigeria, Ghana, and South Africa in having introduced digital currencies, even as several others have plans in the works. But the digital currency, which is the first ever issued by the country¡¯s central bank, hit the market this week with a lukewarm reception from economists and Zimbabwean citizens.

Now, before we dive into the fearful responses coming from economists, let's first understand what this gold-backed digital currency is all about.

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What is a gold-backed digital currency?

Backed by a certain amount of gold, which helps keep its value stable, this currency is tied to the market value of the gold. The Zimbabwe gold-backed digital currency will be used as legal tender and a store of value alongside the Zimbabwean dollar and bond notes. Users can buy and sell it using Zimbabwean dollars and other foreign currencies, the report mentioned.

Ideally, backing a digital currency with gold involves having a certain measure of gold reserves and depends on the current market value of gold.

According to state-owned media reports, Zimbabwe in April had 350 kg (12,346 ounces) of gold in reserves valued at $22.80 million at the current price and intends to build reserves to around $100 million.

Zimbabwe¡¯s gold-backed digital tokens have a vesting period of 180 days, have a prescribed asset status, and are acceptable as collateral for loans, too.

Why has the digital currency been introduced?

Zimbabwe, where hyperinflation has been a recurring economic feature over the last two decades, reportedly uses both the US dollar and the Zimbabwe dollar for transactions.

The latest move by the African nation to introduce gold-backed digital currency after introducing similar coins is part of a wider plan by the central bank to stabilise the country¡¯s local currency, which has been faltering against the US dollar, by mopping up excess liquidity in the market.

The Zimbabwe dollar is currently trading at more than $2,000 for $1 US in the black market.

Historically, Zimbabwe's currency system has largely been unstable, which has further sparked fears among economists, and even the IMF (International Monetary Fund) has warned the country against it.

Let us look at the timeline of major currency-related policy changes in Zimbabwe's recent history:

Timeline Of Currency Policy Changes in Zimbabwe

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1980: Rhodesian dollar is renamed the ¡°Zimbabwe dollar¡± after independence from Britain.

2003: Zimbabwe issues the first series of low-denomination bearer cheques to ease cash shortages.

2006: Zimbabwe issues a second series of higher-denomination bearer cheques until 2008, with as much as 10 trillion dollar notes being issued as inflation ravages the economy.

2008: 100 trillion dollar banknote was released by the Reserve Bank of Zimbabwe (RBZ) during the crisis peak of Zimbabwe¡¯s massive hyperinflation period in 2008.

2009: A multi-currency system involving the US dollar and other major currencies ¨C such as the euro, the British pound and the South African rand ¨C is adopted to end hyperinflation.

2009: Zimbabwe dollar is de-monetised (struck off as legal tender) as the use of multi-currencies takes precedence.

2016: The bond note, a currency the central bank claims has the same value as the US dollar, is introduced in December.

2018: Zimbabwe again reintroduces the Zimbabwe dollar, also known as the real time gross settlement (RTGS) dollar.

2019: US dollar is outlawed in local transactions.

2022: Zimbabwe launches gold coins to stabilise currency downfall.

2023: Zimbabwe introduces gold-backed digital currency.

Economists & IMF Express Word Of Caution

The new gold backed digital currency has for now failed to convince many economists regarding its effectiveness and the whole idea behind its introduction.

Even the IMF has warned the nation against it. IMF cautioned Zimbabwe against adopting a gold-backed digital currency to deal with macroeconomic challenges like volatility in the local currency, saying it should rather liberalise its foreign-exchange market.

On the other hand Clive Mphambela, the chief director of communications in the Ministry of Finance and Economic Development, said ¡°These are financial instruments designed to give an investment alternative to gold coins and other asset classes¡±, as per the report.

But Godfrey Kanyenze, an economist and founder of the Labour and Economic Development Research Institute of Zimbabwe (LEDRIZ), lauded the introduction of the digital currency but said it would not solve Zimbabwe¡¯s currency woes.

¡°While the idea of launching digital coins is noble as it mops up excess liquidity and stabilises the local unit, this is no different from the gold coins introduced by the central bank last year that have failed to stem the money supply growth,¡± Kanyenze said.

He reportedly said Zimbabwe was currently grappling with a ¡°confidence and trust deficit emanating from legacy issues such as when the country experienced hyperinflation that ended in 2009 where people lost their money and savings.¡±

¡°The reality is that while the gold-backed digital coins are good, they ¡­ cater to the rich and are exclusionary,¡± Kanyenze said. ¡°Ordinary people don¡¯t have savings and face extreme poverty, which is at least 40 percent. It¡¯s necessary but the gold coins also did not go far in solving the problems.¡±

Zimbabwe's former Finance Minister, Tendai Biti, too attacked the new gold-backed digital currency, saying the central bank should instead establish market stability by floating the Zimbabwe dollar. He also posted a long Twitter thread regarding this.

2)..a tsunami that saw billions of US$ assets including pensions being wiped off before the ¡° legalization ¡° of the grand theft in February 2019 through SI 33 of 2019. It was the same Bank that de-dollarized the economy & created the myth that it¡¯s new currency ,the RTGS$ was ¡­ pic.twitter.com/TMurwRWCfR

¡ª TENDAI BITI (@BitiTendai) May 5, 2023

¡°The introduction of the gold-backed digital currency is therefore a psychopathic exercise in self-delusion,¡± he said. ¡°The Zimbabwe dollar has failed because of the absence of trust in the regime. The digital currency will suffer the same brutal fate that the local dollar faces.¡±

"Zimbabwe Ranks Lowest In Investment Attractiveness"

Another economist expressed concerns, and said that a lack of trust in the digital-currency could hinder progress. Steve Hanke, a professor of applied economics at John Hopkins University in the US, said the gold coins are bound to fail like the gold coins before them, as per the report.

¡°After making inaccessible gold coins legal tender in 2022, Zimbabwe is trying to salvage the Zim dollar with another bizarre idea: introducing a digital currency next month,¡± Hanke said. ¡°Enough is enough. Zimbabwe must mothball the Reserve Bank & officially adopt the USD."

The economist also tweeted yesterday, mentioning that Zimbabwe ranks the lowest out of 62 nations in investment attractiveness as per the Fraser Institute's 2022 Annual Survey.

#EconWatch: In Fraser Institute's 2022 Annual Survey of Mining Companies, #Zimbabwe ranks the LOWEST out of 62 nations in Investment Attractiveness, with a horrific score of 34.29/100. Pres. Mnangagwa & ZANU-PF = INCOMPETENCE & CORRUPTION. pic.twitter.com/xjYFmdNhj4

¡ª Steve Hanke (@steve_hanke) May 10, 2023

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