Barely a year after releasing a gold-backed digital currency for peer-to-peer and peer-to-business transactions, Zimbabwe’s central bank is mulling a new iteration of the Zimbabwe dollar: a gold-backed currency.
Earlier this month, finance & economic development minister Mthuli Ncube told journalists that Zimbabwe is on “a quest for currency stability”. “We want to make sure that the growth we have achieved so far — which is very strong — is maintained and even increased. We can only do that if we have further stability in the domestic currency ... And the way to do that is perhaps to link the exchange rate to some hard asset, such as gold.”
It seems monetary authorities are taking the gold-backed currency plan seriously.
So far, central bank chief John Mangudya says the country has accumulated 25,000oz of gold reserves from mining royalties — a development that suggests gold will play a key role in currency stabilisation efforts.
The quest for stability is a necessary move. Zimbabwe was forced to adopt the use of multicurrencies in 2009 to end runaway inflation (see box). It subsequently returned to the local dollar — only, that has continued to falter against major currencies. And the introduction of gold coins in 2022 and a gold-backed digital currency in 2023 didn’t put an end to the slide: on the official market the currency is down more than 50% against the US dollar this year; on the black market it’s down about 70%.
But the means is unusual. Globally, the gold standard was abandoned by the 1970s — though central banks retain gold reserves as a store of value, and a particularly important one in times of financial uncertainty, as a hedge against inflation.
For the move to be successful, however, there needs to be confidence in the system, as Voice of America reports. The failure of the gold coins and digital currency suggests Zimbabweans could be sceptical.
Clever Sakupa, a shop owner in Budiriro, certainly is. “I don’t believe in the proposed currency. I have never believed anything they [the government] say,” he tells the FM. “No currency has ever worked.”
Analysts, too, aren’t buying the idea. “I don’t think the gold-backed currency is the solution to Zimbabwe’s monetary or local currency stability and challenges that we have been facing over the years,” Harare-based political and economic analyst Rashweat Mukundu tells the FM. That’s because the issues are broader than just currency stabilisation — they have their roots in poor economic performance and disastrous government policies.
“There is going to be strong demand for the US dollar regardless of whether there is a gold-backed currency or not,” Mukundu says.
The government is very keen to change currency names without addressing the causes of the currency fall
— Victor Bhoroma
Harare-based independent economist Victor Bhoroma also believes the government’s move is wrong-headed. “The government is very keen to change currency names without addressing the causes of the currency fall,” he says, adding that introducing a new currency without addressing “the necessary market and governance reforms” will not solve Zimbabwe’s unpredictable monetary policy.
Part of the problem is a lack of fiscal discipline and the central bank’s “quasi-fiscal operations” that create demand for foreign currency through the printing of money. For instance, the parallel market rate tends to spiral out of control whenever the government pays its obligations to its contractors. As contractors seek to preserve the value of their money, they seek US dollars on the foreign currency black market.
In Bhoroma’s view, the central bank’s monetary policy must be independent from “political interference, and that needs legislation”.
That could be something of a pipe dream. The central bank is generally believed to be under the control of the ruling Zanu-PF party and is blamed for printing too much money, fuelling currency devaluation and inflation.
A gold-backed currency, while useful in ensuring stability, may not be the solution. The suspicion is that the central bank will continue to print Zimbabwe dollars in excess of the gold reserves, defeating the purpose of the exercise.
As far as Bhoroma is concerned, the solution lies in a restructuring of the government departments and expenditure cuts “that can then limit the budget deficit, limit the need to ... fund government projects through the central bank and excessively borrow from the local market”.
“Zimbabwe will never have a stable local currency regardless of the name it is given. So far, there is no political will [to initiate] the actual reforms that bring local currency stability. If there are no reforms, it would be ideal not to create more volatility and unpredictability in the market. So the new currency is not the panacea to the monetary crisis.”
1980: The Rhodesian dollar is renamed the Zimbabwe dollar
2003: Zimbabwe issues low-denomination bearer cheques to ease cash shortages
2006: The country issues a second series of higher-denomination bearer cheques, reaching up to Z$10-trillion by 2008
2009: A multicurrency system is adopted to end hyperinflation; the Zimbabwe dollar is demonetised
2016: The central bank introduces the bond note, claiming it has the same value as the US dollar
2018: The Zimbabwe dollar, also known as the “real time gross settlement dollar”, is reintroduced
2019: The US dollar is outlawed in local transactions
2022: Zimbabwe launches gold coins to stabilise its faltering currency
2023: The country introduces a gold-backed digital currency
— Zimbabwe currency timeline
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