By Monica Johnson, International Banker
On May 8, the Reserve Bank of Zimbabwe (RBZ) began issuing gold-backed digital tokens as legal tender to stabilise the Zimbabwean dollar (ZWL) and protect citizens’ purchasing power. But while this new currency may reduce reliance on the US dollar and potentially lower exchange-rate volatility, many believe it will prove inadequate in solving Zimbabwe’s deep-rooted economic problems.
It is not controversial to declare 2023 an unequivocal disaster for the Zimbabwean dollar thus far, with the second quarter, in particular, seeing the currency plummet from 894 against the US dollar to more than 6,700 by the end of June. The impact on inflation has been gruesome, with June seeing annual consumer-price inflation skyrocket to 175.8 percent from 86.5 percent a month earlier. With the ruling ZANU-PF (Zimbabwe African National Union-Patriotic Front) party having fanned the flames of this latest currency crisis by printing vast sums of money ahead of Zimbabwe’s general elections in August, fears are growing that yet another hyperinflation crisis is about to unfold in the country, similar to the infamous one in 2008 that destroyed a previous incarnation of the Zimbabwean dollar and wiped out Zimbabweans’ savings and pensions. The nadir of that crisis saw the launch of the 100 trillion Zimbabwean dollar banknote, worth only US$33.
With both this new Zimbabwean dollar and the US dollar qualifying as legal tender in the country, demand for the greenback has soared this year at the expense of the local currency. Now teetering on the edge of another prolonged period of hyperinflation, Zimbabweans have become desperate to get their hands on stores of value that can protect their purchasing power. “What we have noticed is that demand for foreign currency, apart from being driven by the need to import goods and services in Zimbabwe, is also viewed as a store of value,” the RBZ’s governor John (Panonesta) Mangudya told local news publication The Sunday Mail in April. “It means anyone with the local currency would want to convert it to foreign currency.”
This is also the opinion of independent economist Gift Mugano, who recently told Reuters of Zimbabwe’s urgent need to redollarise. “We are at the graveyard. We are actually reading the last verses before we lower the Zimdollar down [into] the grave,” Mugano added. But Reuters also spoke with central bank governor John Mangudya, who acknowledged that Zimbabwe simply does not have enough dollars to execute such a policy on this occasion. “This is not the end of the Zimdollar. This country has no capacity to fully dollarise. It is not sustainable,” Mangudya added.
Against this desperate backdrop, the central bank has instead opted to launch its own gold-backed digital token in a bid to rescue its battered, inflation-ridden currency. This is not the first time the authorities have turned to gold to ease pressure on the country’s weak currency situation. Indeed, as recently as July 2022, the central bank issued gold coins, each worth around $1,800 at the time, to reduce local demand for US dollars. “We are now providing that store of value to ensure that people do not run to the parallel market in search for foreign currency to store value,” Mangudya said, noting that the coins represent respect for the people of Zimbabwe. “And there is no other better product that can be used to store value other than gold.”
The new electronic money, backed by gold bullion that’s guided by the international gold price as determined by the London Bullion Market Association (LBMA) and held at the RBZ, meanwhile, has also been introduced to stabilise the local currency, ostensibly allowing citizens to exchange modest amounts of local fiat currency for the new tokens as a way to store value and protect themselves against exchange-rate volatility—two key benefits that holders of gold have historically enjoyed. According to the central bank, moreover, the new tokens will expand the value-preserving instruments available in the economy, enhance the divisibility of the investment instruments and widen their access and usage by the public.
The tokens can also be purchased through local banks, with transactions enabled via “e-gold wallets or e-gold cards” held by banks. Tokens held on these cards will be tradable and capable of facilitating person-to-person (P2P) and person-to-business (P2B) transactions and settlements, such that the gold-backed digital tokens can be used both as a means of payment and a store of value. There is a vesting period of 180 days, after which the tokens can be traded. At their discretion, holders of physical gold coins can exchange or convert the physical gold coins into gold-backed digital tokens through the banking system, the RBZ advised, adding that the tokens will also be used for trade and making payments in a later phase. And the pricing of the gold-backed digital tokens in foreign currencies will remain the same as the pricing model for the physical gold coins.
Zimbabwe’s move toward gold-backed digital money can also be viewed through the lens of the global de-dollarisation movement, which has gained steam over the last 18 months. With many central banks worldwide opting to boost their gold holdings whilst simultaneously shedding their dollar holdings and countries increasingly opting to trade with each other in local currencies, the global reliance on the greenback has continued to wane this year. Given this trend, the Southern African nation’s decision to reduce its dependence on the US currency should not come as a surprise.
According to Varun Paul, former head of fintech at the Bank of England (BoE) and current central bank digital currency (CBDC) and market infrastructure director at crypto-custody platform Fireblocks, the introduction of the gold-backed digital currency should reduce Zimbabweans’ reliance on the US dollar, offer a way for investors to diversify their portfolios and lower exchange-rate volatility. But when speaking to crypto publication CoinDesk, Paul also warned that a gold-backed digital token “in itself cannot be the solution”.
Indeed, lacklustre demand for the token thus far suggests that its power to combat hyperinflation is likely to be minimal. Official data showed that almost 140 kilogrammes of gold reserves were used to back the first sale of digital tokens four days after issuance, with only 135 applications submitted to the central bank valued at 14 billion Zimbabwean dollars ($12 million) to purchase the digital money, 132 of which were from those seeking to convert their Zimbabwean dollars. Since then, demand has only weakened further, to the extent that by mid-June, there were only 35 new applications for the gold-backed currency. The issuance of the tokens has also failed to prevent the local currency from sliding further against the US dollar; on the contrary, May and June saw the worst depreciation of the Zimbabwean dollar ever recorded.
While Godfrey Kanyenze, economist and founder of the Labour and Economic Development Research Institute of Zimbabwe (LEDRIZ), praised the digital currency’s introduction, he was also sceptical of the token’s ability to solve Zimbabwe’s currency problems. “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 told Al Jazeera, adding that 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”. Kanyenze also lamented that these digital-currency tokens cater to the rich and are exclusionary. “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.”
The International Monetary Fund (IMF), meanwhile, has expressed considerable concern over Zimbabwe’s digital-currency ambitions, urging it to opt for employing more conventional tools to resolve its macroeconomic woes. Such measures include maintaining a tight monetary-policy stance and accelerating the liberalisation of the foreign-currency market by removing restrictions on the exchange rate at which banks, authorised dealers and businesses transact. “A careful assessment should be conducted to ensure that the benefits from this measure outweigh the costs and potential risks including, for instance, macroeconomic and financial stability risks, legal and operational risks, governance risks, cost of forgone FX [foreign exchange] reserves,” an IMF spokesperson told Bloomberg on May 9, a day after the central bank’s first sale.