Zimbabwe introduces gold-backed currency amidst economic challenges

Zimbabwe remains steadfast in its adoption of a new gold-backed currency, commencing its trading activities in the market amidst apprehensions regarding its efficacy in mitigating the persistent hyperinflation challenges that have afflicted the nation over the decades. The newly introduced currency, named the Zimbabwe Gold (ZiG), was announced by the country’s central bank, initially pegged at a rate of 13.56 to $1, supplanting the Real Time Gross Settlement Dollar (RTGS), which had depreciated by approximately 80% this year and had been trading at 28,720 to $1 prior to the transition.Over the weekend, current bank balances were converted to the new currency, with customers granted a 21-day window to convert their cash holdings. The Reserve Bank of Zimbabwe has indicated that new banknotes will be introduced into circulation by the end of the month.The preceding currency, known as the RTGS or the Zimdollar, was introduced in 2019 following a decade of dollarization, which included the issuance of bond notes and coins pegged to the United States Dollar in 2014 and 2016, respectively. However, the Zimdollar failed to engender confidence among the populace, witnessing a devaluation this year that propelled annual inflation to over 55%, evoking memories of the hyperinflationary period experienced between 2007 and 2009 under President Mugabe’s administration.Presently, commercial banks have begun adopting the new official exchange rate. Nevertheless, concerns persist regarding the sustainability of the new currency’s value, characterized by the central bank as “structured” and “anchored by a composite basket of foreign currency and precious metals (mainly gold) held as reserves.” Additionally, uncertainties linger regarding the level of acceptance of the new currency among companies and citizens for transactions and wealth preservation purposes.According to reports, approximately 80% to 85% of transactions are currently conducted using foreign currencies, as confirmed by the central bank.Key points to consider:The introduction of the new gold-backed currency by Zimbabwe’s central bank aims to stabilize the economy and shield citizens from currency fluctuations and soaring inflation rates.Hasnain Malaik of research firm Tellimer identifies Zimbabwe’s core financial challenge as an inadequate $285 million in hard currency and gold reserves, asserting that addressing these root causes is imperative for the country’s economic resurgence.