Zimbabwe's proposed gold-backed digital currency will be susceptible to the lack of trust that has plagued it's other monetary instruments, economists said yesterday.
However, fintech experts were more welcoming to the new instrument, saying it would be a worthy store of value.
Reserve Bank of Zimbabwe Governor John Mangudya said on Sunday that the inflation-plagued northern neighbour to South Africa was looking to introduce a gold-backed digital token to fight inflation and loss of value in the Zim dollar local unit of exchange. Zimbabwe introduced physical gold coins last year to mop up excess local currency liquidity.
"We shall soon be introducing digital gold tokens to ensure that those with low amounts of local currency are able to purchase the gold units (gold coins)," state-controlled media quoted Mangudya as saying.
The International Monetary Fund (IMF) has previously advised Zimbabwe against the gold coins.
The IMF urged President Emerson Mnangagwa's administration to “use appropriate interest-bearing instruments to mop up liquidity and winding down the use of gold coins” in the economy.
Economists have now weighed in against further usage of the gold coins, which are now being expanded through use of bullion-backed digital tokens .
"Particularly because the proposed digital currency is not tangible, the trust deficit that rests with the existing Zimbabwe dollar will likely follow a gold-backed digital token, since they share the same issuing authority and do not necessarily have stronger governance guidelines," Chiedza Madzima, the head of operational risk and Africa research at Fitch Solutions told Business Report yesterday.
She said the value of the existing Zimbabwe dollar was already "determined by supply and demand, perceptions of FX (forex) availability in the market and it was ultimately backed by market confidence in the issuing authority and economic outlook for the country.
"The relationship may not be linear, but there will likely be a range of spreads that will form between the digital currency, physical gold, physical Zim dollar and physical USD.
"The best means to fight volatility will be through an improvement in governance, stronger anti-corruption efforts, and a reduction in risk of debt monetisation and fiscal slippages," she explained.
Zimbabwe’s year on year inflation rate currently stands at 87.6%, while the Zimbabwe dollar has further plunged in value to about 1USD:ZWL1000 on official markets. However, on the thriving and more popular parallel market, the exchange rate has ballooned to about 1USD:ZWL1700.
Zimbabwean authorities are hoping that the gold-backed digital token will be a preferred store of value that those holding local currency, and using it to pursue foreign currency, will use.
Itai Chadoka, a crypto currency expert, said that "by backing the digital currency with gold, it is likely the Zimbabwe central bank is attempting to provide some assurance regarding the digital asset's value and stability.
"This move could thus be aimed at helping to stabilise and increase confidence in the country's local currency. This may help to reduce inflation... potentially leading to a more stable currency option for Zimbabweans, who have experienced significant economic instability over the past 20 plus years," he said.
However, he added: "The success of Zimbabwe's gold-backed digital currency will largely depend on the willingness of locals to adopt it and the government's ability to manage its implementation effectively."
Other crypto currency experts said it was "likely that the digital currency will be redeemable to physical gold" at a future date.
This comes as the Zimbabwe dollar is increasingly being shunned for transactions, with usage of the US Dollar creeping up, according to the Confederation of Zimbabwe Industries.
Pensions have also taken a knock, with economist Brains Muchemwa saying gold assets can be a worthwhile investment for pension funds seeking a hedge against inflation and local currency volatility.
"Gold should be a prescribed asset of not less than 60% for pension funds and insurance companies. We need to create a vibrant market for gold locally," he said.
BUSINESS REPORT