Zimbabwe’s gold-backed digital token is not going to stabilize the country’s local currency as the central bank hopes, two economists told CoinDesk.
On May 8, the Reserve Bank of Zimbabwe issued gold-backed digital tokens, which are a form of electronic money backed by the country's gold reserves. Gold-backed digital token investors will be able to hold and exchange their tokens in the first phase of the project, and in the next phase be able to trade and make payments, the RBZ said.
An official at the central bank told the local Sunday Mail in April that the RBZ was issuing this digital token to try and stabilize the Zimbabwean dollar, which dramatically collapsed in 2008 setting record inflation rates at the time as high as 79,600,000,000% per month.
Zimbabwe’s struggles with hyperinflation has since been making headlines. In 2009, inflation was so devastating that the country issued a new Zimbabwean dollar (ZWL), shedding twelve zeros from the earlier currency (ZWD). By November 2022, the annual consumer price inflation for a compressed basket of goods was at 107% in the country and in June, inflation rose to 175.8% following devaluations of the local currency. Researchers are not convinced that a digital token will solve the country’s currency woes.
“It's not the panacea to the challenges it’s wrestling,” Prosper Chitambara, senior research economist and policy advisor at Labour and Economic Development Research Institute of Zimbabwe (LEDRIZ) said.
The reason experts are skeptical of the gold-backed digital token’s prowess is because it may not be enough to stop money supply growth, which is the real problem at hand. A digital token, without strong macroeconomic policies in place, cannot reduce the amount of money circulating in the economy, Chitambara said.
In Zimbabwe, people can now use both the new Zimbabwean dollar and the U.S. dollar. However, for most locals like Chitambara, the “Zim” dollar can be seen as a “hot potato” – once people get their hands on it, they want to immediately exchange it for the less volatile U.S. dollar, he said.
Central bank officials in the country want the gold-backed digital currency to replace the need and demand for foreign currency.
“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,” RBZ Governor John Mangudya told the Sunday Mail in April. “It means anyone with the local currency would want to convert it to foreign currency.” And he added that there has been a limited supply lately in foreign currency.
In a situation of hyperinflation, like the one Zimbabwe is in, people are always going to “look for a store of value, something that is going to protect their purchasing power,” Paul said.
So the RBZ wants the gold-backed digital token to help address this demand for a store of value, Mangudya told the Sunday Mail.
Too many Zimbabwean dollars have been chasing U.S. dollars and this has caused the local currency to depreciate, Chitambara said. The idea is to introduce the gold-backed digital currency to reduce reliance on the U.S. dollar and eliminate that exchange rate volatility, said Varun Paul, central bank digital currency and market infrastructure director at institutional crypto custody platform Fireblocks.
But a gold-backed digital token “in itself cannot be the solution,” Paul said.
Paul and Chitambara say the gold-backed digital token may have some short-term benefits as it may offer investors a way to diversify their portfolios and perhaps even act as a store of value. But the token's slow uptake is already an indication that it's powerless to tackle hyperinflation all by itself.
When the gold-backed digital token was first issued, there was some interest in it. Only four days after issuance, the token had 135 applications worth around $12 million dollars at the time – 132 of those applications were from individuals or companies looking to convert their Zim dollars.
However, this did not stop the depreciation of the currency against the U.S. dollar. On May 8, when the gold-baked tokens were issued, $1 U.S. was worth 1,109 new Zim dollars, up from 949 a month earlier, according to Investing.com.
The demand for the token has since plummeted. According to the latest June figures from the central bank, there were only 35 new applications for the gold-backed currency at that time.
To truly help better the country's local currency dilemma, Zimbabwe has to put sound policies in place, Chitambara and Paul said.
“I don't think there's any substitution for really sound macroeconomic management,” Paul said.
Chitambara says the RBZ has implemented restrictive monetary policy, whereby central banks reduce the amount of money circulating in the economy by raising interest rates or hiking banks’ reserve requirements, while keeping its fiscal policy expansionary. That has meant public spending has continued to rise in Zimbabwe despite the bank’s attempts to control the money supply.
Zimbabwe’s gold-backed digital token is not going to help stabilize the local currency, because “the solution is to control the money supply growth," Chitambara said.
Last year, the RBZ announced it planned on doubling its spending but, as a countermeasure, the central bank also raised interest rates from 140% to 150% in June, which are considerably higher than many other countries.
Some economists have suggested that Zimbabwe should just scrap its local currency altogether – something the government doesn't want to do.
The International Monetary Fund (IMF), which has held discussions with Zimbabwe about clearing its substantial debt with international financial institutions, is also uncertain about the effectiveness of the gold-backed digital token initiative.
“IMF staff would require more details and information about the design, implementation, and operation of RBZ’s gold-backed digital token initiative, and safeguard policies to ascertain the efficacy of the proposed measure,” the IMF said in response to a question about their thoughts on the gold-backed digital token.
As a solution to the country’s currency struggles, Chitambara said: “Don’t spend what you don’t have.”