Two events that seem unconnected on the surface have taken the Zimbabwe monetary scene by storm. Over the last few weeks, The Reserve Bank and government media have introduced and talked up a gold-backed digital currency to help stabilise Zimbabwe’s currency. Meanwhile, memories of 2008 have been visited upon Zimbabweans as exchange rates have been changing almost by the hour, with Zimbabweans now requiring as much as 2000 Zimbabwean dollars to buy a single US Dollar.
Gold-backed digital currency
The Reserve Bank of Zimbabwe has announced a new digital currency called the Gold-backed digital currency (GBD), which they say will be backed by a reserve of gold. This new currency is expected to address the country’s foreign currency shortages and combat inflation by providing a stable and reliable currency. The GBD will be traded on a blockchain platform, expected to provide greater transaction transparency and security.
Zimbabweans are rightly sceptical about this “new” idea. Our current currency was introduced with the backing of US Dollars at a 1:1 peg with the US Dollar. Recent market developments place the Zimbabwean dollar at US$0.0005 or one-twentieth of a US cent. The recent announcement has all the same hallmarks of previous announcements, which have failed to rescue the country’s currency. A grand announcement, little detail, no clear plan, and little stakeholder consultation.
What about Gold Coins
In our early analysis of Gold coins, we noted how it would be difficult to implement them as currency because of the lack of divisibility. In all fairness, the Gold coins were always put forward as a saving mechanism for a store of value. They were expected to stabilise the currency by mopping up excess money supply in the economy; giving Zimbabwean dollars a destination besides conversion to US dollars. Recent market developments will bring questions initially asked about the Gold Coins back to roost. How and why have the gold coins failed to stabilise the currency?
Do we need another currency?
Does Zimbabwe need another currency? The first question that came to mind for many is, why not back the existing currency with gold? Why create a new currency? The RBZ’s history with digital currency has also raised eyebrows. It is abundantly evident that the Zimbabwean dollar suffers from a problem of money supply growth that affects confidence in it. It makes no sense to hold Zimbabwean dollars. Many more poignant questions have been asked of this move, but another the RBZ specialises in is lack of consultation.
The market responds, and it’s not good
The Zimbabwean dollar has steadily declined in the last few months. The Gold coins failed to prop up the ailing currency. Whether on the official or parallel markets, the Zimbabwean dollar suffered massive devaluation. What has happened over the last week has brought memories of 2008 back. Parallel market Exchange rates change almost by the hour.
As we can see in the graph above, the progression of the parallel market rate shows us a trend of things getting worse. It was only February when we lamented the parallel market rate reaching 1000. In just under two months, the rate has doubled. The currency value has halved. This is a far cry from what once was the strongest currency in the region.
Is this the end of the Zimbabwean dollar?
While the government committed to the Zimbabwean dollar until at least 2025, their actions have many questioning whether this is the curtain call of the second coming of the local unit. ZimStat was compelled by statutory instruments to abandon reporting inflation in Zimbabwean and use a blended CPI, which has confused many. Now the effort is being put into launching another currency.
The idea of a gold-backed digital currency is not new or unique. However, the motivations of the RBZ are questionable, given their poor track record with managing currencies. Zimbabweans have been given a currency backed by a real value asset before, which has performed dismally. Meanwhile, the market has responded to the most recent developments emphatically.
