Zimbabwe, which has suffered from currency depreciation, is determined to leave a strong mark in financial history. In early May, the small African country announced plans to issue a digital currency backed by gold reserves as legal tender.
Two weeks later, Zimbabwe's central bank announced the results of the first gold-standard digital currency issuance: the bank received a total of 135 subscription applications worth 14 billion Zimbabwean dollars ($12 million), meaning that Zimbabwe needs at least 140 kilograms of gold reserves to support the first digital currency issuance. Zimbabwe's central bank plans to issue another batch of gold-standard digital currencies on May 18.
Just to get rid of the dollar?
Zimbabwe issued a gold-standard digital currency, mainly to curb the depreciation of the Zimbabwe dollar.
According to local media, John Mangudya, governor of the Central Bank of Zimbabwe, said:
"The issuance of gold-backed digital tokens is to expand the value preservation instruments available in the economy and to improve the divisibility of investment vehicles so that they can be more widely used by the public."
About 70 per cent of Zimbabwe's currency is in United States dollars. Since the beginning of this year, the Zimbabwean dollar has depreciated by more than 40% against the US dollar. At the official exchange rate, 1 US dollar can currently be exchanged for about 1,001 Zimbabwe dollars, but on the black market, 1 US dollar can usually be exchanged for 1,500 to 2,300 Zimbabwe dollars.
For years, due to economic collapse and a disorganized monetary system, Zimbabwe relied on borrowing dollars from the International Monetary Fund (IMF) to keep the country afloat. Therefore, the issuance of a gold-standard digital currency to replace the US dollar is undoubtedly weakening the interests of US dollar creditors represented by the IMF.
The IMF is very unhappy with Zimbabwe's gold-standard digital currency issuance plan:
"A careful assessment should be conducted to ensure that the benefits of this measure outweigh the costs and potential risks, including macroeconomic and financial stability risks, legal and operational risks, governance risks, and the cost of lost foreign exchange reserves."
The IMF believes Zimbabwe should consider more conventional measures to address economic challenges, such as tightening monetary policy, removing exchange rate restrictions on banks, authorized dealers and corporate transactions, and accelerating the liberalization of foreign exchange markets.
Current situation in Zimbabwe: cash shortages, shops with paper and candy change
Zimbabwe, a landlocked country in southern Africa, is probably the most famous negative textbook in financial history. At the beginning of this century, the Zimbabwean government's aggressive land reform policies caused the country's economy to plummet and inflation to soar.
How severe was hyperinflation at that time?
In July 2008, Zimbabwe's inflation rate reached 231 million million per cent. In 2009, the Bank of Zimbabwe issued 100 trillion Zimbabwe dollar banknotes, becoming the world's largest number of "zero" banknotes. But the 100 trillion Zimbabwe dollar bill was only equivalent to more than 40 cents at the time. As a result, the Jinyuan was dubbed by Chinese netizens as "the only currency in the world that can compete with Tiandi Bank".
After this hyperinflation, which surprised the global financial community, Zimbabwe switched to its local currency and adopted foreign currencies such as the US dollar entirely as its currency to stabilize the economy.
However, due to the ongoing economic downturn, Zimbabwe still faces severe cash shortages. In 2016. The Zimbabwean government began issuing a bond currency pegged to the US dollar, but it was still unable to ensure market liquidity. In 2019, the government began to reissue the Zimbabwe dollar and announced that it would no longer allow foreign currencies such as the US dollar to circulate.
But the fundamentals of the economy have not improved, and inflation in Zimbabwe has worsened since the pandemic. In 2022, the Zimbabwean government announced the reintroduction of the US dollar.
In March, the Wall Street Journal reported that Zimbabwe's currency was dysfunctional and cash was short, and merchants had begun printing their own "money" — handwritten numbers on shredded pieces of paper that customers could use to pay for future purchases. Others offer physical change, such as juice boxes, pens or cheese slices.
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