Zimbabwe launches ‘gold-backed’ currency to replace dollar

Zimbabwe said on Friday that it will launch a new currency backed by the country’s gold reserves, the latest move by President Emmerson Mnangagwa’s government to stabilize its fast devaluing currency.

Zim Gold (ZiG), to be introduced on April 8, will also be backed by foreign currencies and other precious minerals, the new central bank governor John Mushayavanhu told local press, adding that it would circulate alongside a basket of other currencies.

The ZiG currency will be introduced at a rate of 13.56 per U.S. dollar, along with a new interest rate of 20%, a monumental cut from the previous 130% rate, which stood as the highest central bank rate globally. Banks are expected to convert their existing Zimbabwean dollar balances into the ZiG.

Analysts and economists have suggested that this situation highlights more fundamental issues, including the government’s practice of printing money to finance spending. 

For BMO Global Commodities expert Colin Hamilton the new currency strategy could have potential wider implications, particularly regarding trade. “We expect that many of Zimbabwe’s exports to China might now be paid for in Chinese Yuan (rather than US dollars), which can be converted into gold through the Shanghai Gold Exchange,” Hamilton wrote in a note to investors.

“We expect this to become a growing trend in China’s trade with developing countries, amid the wider push to grow the international influence of the CNY, which would also bring more gold back into the global monetary system,” Hamilton said.

Mnangagwa’s government decision to put in place a “structured currency” comes almost a year after introducing a gold-backed digital currency for peer-to-peer and peer-to-business transactions. The product was expected to act as a legal tender and a store of value as the country’s currency continues to lose ground against major currencies.

Previous to these attempts, the government had tried multiple strategies to stabilize the Zimbabwean dollar, which was reintroduced in 2018. It had been scrapped a decade earlier due to hyperinflation of 5 billion per cent, according to the International Monetary Fund, nearly a world record.

The IMF has criticized the unconventional methods favoured by Zimbabwean officials to address the depreciation of the local currency.

Since the beginning of the year, the official value of the current Zimbabwean dollar has dropped by four-fifths, making it the world’s second worst-performing currency.