Zimbabwe's gold experiment

The African country has embarked on an audacious gold-related experiment. In early May it launched a gold-backed digital currency, one that the government hopes will become standard legal tender. Users of the digital currency can buy (via government auctions) and sell it using Zimbabwean dollars and other foreign currencies. Zimbabwe has struggled for years with economic difficulties, including rampant inflation, which reached 256% last year.

The Zimbabwean dollar has consequently collapsed against the US Dollar, as people turn to a currency that has greater stability. The Zimbabwean dollar has depreciated by 40% this year alone, officially trading at Zim$ 1,070/$1 but the black market rate hovers around twice that. Use of the US Dollar far exceeds that of the local currency; an estimated 77% of transactions now use the US Dollar. Zimbabwe has witnessed a “growing US dollar cash economy” (see chart below) says Mthuli Ncube, finance minister. It is hoped that the digital coin will stabilise the local currency, and ease the pressure on the country's dwindling US Dollar reserves.

Zimbabwe has used 1.4 tonnes of gold (out of a total 3.5 tonnes in central bank reserves) to back the digital currency. It will produce some 40 tonnes of gold this year. The International Monetary Fund (IMF) has criticised the gold-backed digital currency, urging instead that Zimbabwe accelerates the liberalization of the foreign currency market by removing restrictions on the exchange rate. The backing of the digital currency by gold may well give local Zimbabweans greater confidence in this new currency, but it does expose the country to the international gold price. This kind of unilateral gold ‘standard’ is an experiment the results of which will only be known a while from now.