“It is a sideshow” – analyst blasts the new Zimbabwe dollar currency

A till operator collects new bond notes from a shopper at a supermarket in the capital Harare, Zimbabwe, November 28, 2016.REUTERS/Philimon Bulawayo
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Zimbabwe, a richly endowed country, is set to implement one of the biggest monetary experiments on Monday. As we wrote herethe central bank is planning to introduce new digital tokens backed by gold as it seeks to save the Zimbabwe dollar.

Zimbabwe currency chaos continues

Zimbabwe has become a case study of how not to handle currencies. A few years ago, under Robert Mugabe, the country decided to print money. As a result, it moved into hyperinflation, which forced the government to print trillion-dollar notes.

The government recently introduced another version of the currency. Unfortunately, the Zimbabwe currency has continued to lose value at a rapid pace. It has lost about half of value this year. While the official currency was trading at 1,000 officially, it plunged to 2,200 in the parallel market.

Zimbabwe’s central bank is now working to launch new digital tokens backed against gold. The hope is that the new tokens will provide stability for the economy ahead of the upcoming general election. These tokens will be redeemable after 180 days. The central bank governor said:

“It’s a concept which is pretty straightforward, we tokenize the gold, we have the gold. Every time we issue a coin, it is backed by real gold. We are still finalizing the details, but most countries are asking us how we came up with that plan.”

Still, some analysts are skeptical about the new scheme. In a note to the Financial Times, an analyst called the scheme a sideshow since the central bank had not provided more color about how it will work. He added that the token issue “has absolutely nothing to do with what is happening on the ground.”

Questions about the Zimbabwe tokens remain

There are several important questions about the new Zimbabwe currency. First, there are concerns about how holders will be able to redeem their tokens for gold. Second, there are questions about the exchange rate between the existing Zimbabwe dollar and the new tokens.

Further, in a country well-known for corruption, there are concerns about the audit process for these tokens will be made. Most importantly, it is unclear whether Zimbabwe has the needed gold reserves to back up its currency in the long term.

Zimbabwe produced 35 tons of gold last year, which is equivalent to $2.5 billion. It aims to increase production to 40 tons per year. The central bank has over 350 kilograms of gold in its reserves. Therefore, it will be difficult to back the currency in the long term with these reserves.

Zimbabwe will also need to understand why the gold standard ended in 1970. At the time, the gold standard had led to higher inflation as countries increased converting their dollars to gold.