Zimbabwe’s gold-backed digital token runs into political headwinds

Zimbabwe has been trying to solve its hyperinflation and monetary issues through a myriad of currency experiments that have largely failed over the last 20 years.

In 2003, Zimbabwe introduced bearer cheques before unveiling special agro-cheques with denominations of up to 100 trillion Zimbabwean dollars. In 2009, Zimbabwean authorities adopted the U.S. dollar as legal tender, bringing some stability to the economy.

But when President Mnangagwa dislodged Robert Mugabe from power in 2017, he banned the use of foreign currencies for transactions and reintroduced the Zimbabwean dollar in 2019. The ban was short-lived as Zimbabwe subsequently endorsed a multiple currency basket of legal tender a few months later.

Zimbabwe is trying to gain public trust by linking the digital currency to physical gold reserves. But economists argue that Zimbabwe’s government is itself fueling excess liquidity and inflation by printing money to pay off government contractors for infrastructure development.

They say the digital gold coins will only work if their introduction is matched with focused efforts by the government to target economic fundamentals.

“The efficacy of new tokens will be determined by the market confidence in the issuing authority and related institutions,” Chiedza Madzima, head of Africa research at Fitch Solutions told me. “Adding new currency layers will not solve the fundamental monetary policy issues at play and will do little to quell the underlying drivers of inflation.”

Trust is the critical factor, Kin Mungai, Senior Research Analyst at the Center for Financial Regulation and Inclusion (Cenfri) told me. “Issues to do with corruption and smuggling of gold may undermine public trust in the new tokens so it is important to address that as well as other underlying issues.”

In any case, the U.S. dollar is now dominant as a means of payment in Zimbabwe, according to listed companies financial reports.

Emmanuel Mathe, an independent Bulawayo-based crypto currency analyst, said the gold token approach is a “good initiative as per their intended use to be a store of value.” But he added that “a lot of ground work needs to be done regarding the implementation and the infrastructure” which will determine the market’s confidence. “There needs to be a robust proof of reserve system that authenticates the availability of gold backing the digital currency.”

Jonathan Dharmapalan, CEO of CBDC technology firm eCurrency, agreed with Zimbabwe’s strategy saying other central banks could opt to “issue a gold-backed CBDC to further reinforce trust” in a digital currency. “This could be an enhancement and an interesting feature of digital currency that does not typically apply to other forms of currency.”