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How Will Zimbabwe’s Gold-Backed CBDC Fare in the Face of Hyperinflation and a Lack of Trust?

Zimbabwe has officially launched a new gold-backed digital currency, in response to a number of macroeconomic challenges.

Significant inflation has seen Zimbabwean citizens exchanging all of their local currency in favour of US dollars, in an effort to stop savings from losing value. As the Reserve Bank of Zimbabwe aims to support its struggling currency and fend off extreme demand for the US dollar, is it possible for the digital currency to succeed? 

Since the end of last year, the Zimbabwe dollar has lost more than half its value. As people looked to protect the value of their savings by exchanging it for the less volatile US dollar, it quickly emerged that a shortage of the American currency was also increasing exchange rates.

John Mangudya, governor at The Reserve Bank of Zimbabwe, holds a gold coin
John Mangudya, governor at The Reserve Bank of Zimbabwe, presents a gold coin

July 2022 saw Zimbabwe issue gold coins worth around US$1,800 each. Some success in the venture was seen, although there was a general consensus that the coins weren’t accessible enough for the vast majority of Zimbabwean citizens.

The Reserve Bank’s latest venture to attempt to solve its currency crisis comes in the form of launching a new digital currency backed by gold.

However, because the digital currency is linked to the official currency rate, some view the move as a ‘last-ditch’ attempt to keep some form of demand for the local currency.

Dependent on ‘trust in the government underpinning this currency’

As some suspect the launch is, at least in part, motivated by upcoming elections; mixed in with a feeling that the Zimbabwean Central Bank Digital Currency (CBDC) is simply an attempt to revive a struggling currency, a key barrier to its success may well be trust.

A recent International Labour Organization report revealed that 76 per cent of employment in Zimbabwe is in the informal sector.  With such a large proportion of operations and services existing without informing the relevant authorities, cash has continued to be one of the most popular forms of money in the region, alongside mobile money.

As trust in local currencies remains low, the Reserve Bank will hope that the digital currency can succeed thanks to its link to the more secure gold it is backed by.

Gabby Kusz, CEO of the Global Digital Asset & Cryptocurrency Association, on Zimbabwe digital currency
Gabby Kusz, CEO of the Global Digital Asset & Cryptocurrency Association

Gabby Kusz, CEO of the Global Digital Asset & Cryptocurrency Association, explained the importance of trust in the success of the currency:”Zimbabwe has suffered for many years from hyperinflation – given the difficulties they have had in garnering public trust in their currency due to monetary policy mismanagement, I would expect a gold-backed currency may garner interest from citizens.

“However, the degree to which this trust is lasting will be dependent again on trust in the government underpinning this currency.

“Whether digital or not, the degree to which a government-issued digital currency (gold-backed as it is) is able to resist human manipulation, etc. will ultimately be what decides its success or failure.”

Lessons learned from eNaira

Zimbabwe is not the first country in Africa to introduce a CBDC; the Central Bank of Nigeria issued a digital version of the Naira in October 2021: the eNaira. Despite also experiencing numerous challenges with its currency, adoption has proved to be slow.

Even shortages of new banknotes released in Nigeria which caused riots in February did not result in more people resorting to turning to eNaira. One reason for its slow uptake has been attributed to a lack of places to spend the digital currency, making it far less convenient than cash.

Jonathan Dharmapalan, CEO of eCurrency on Zimbabwe digital currency
Jonathan Dharmapalan, CEO of eCurrency

Jonathan Dharmapalan, CEO of digital fiat currency technology provider for central banks eCurrency, discussed the lessons to be learnt from eNaira’s shortcomings: “The ideal set-up for CBDC in Africa is the two-tiered system. The most important lesson to be learned from the eNaira experiment is that the CBDC has to work ‘seamlessly’ through existing banking and payment platforms.

“The central banks should be focused on the minting and the issuance of digital currency and leave it up to commercial banks and mobile money operators to circulate it to the public.

“In Africa, the best mechanisms to reach the broadest base of the public is through well-established mobile money operators and banks. Central banks that recognise this will leverage these private sector partners as integral to the dissemination of digital currency. A well-designed CBDC implementation will leverage the payments infrastructure in place to provide an interoperable central bank-issued legal tender in digital form to stimulate financial inclusion, convenience, safety and trust in a CBDC.”

A difficult future ahead for African digital currencies?
Andrew Latham, director of content at Supermoney.com
Andrew Latham, director of content at SuperMoney.com

Andrew Latham, director of content at online financial comparison platform SuperMoney.com, explains how Zimbabwe’s past challenges with hyperinflation haven’t put it in an ideal position to ensure future success and adoption:

“It can be difficult to compare the adoption of Zimbabwe’s digital currency with Nigeria’s eNaira since these are two very different currencies. Although Zimbabwe’s gold-backed currency may seem attractive, Nigeria’s eNaira has the advantage of being supported by the largest economy in Africa. It’s worth noting that Zimbabwe’s gold-backed digital currency was launched after the introduction of physical gold coins in 2022, but this did not significantly stabilise the local currency.

“Ultimately, the success of both digital currencies will depend on trust, stability, and accessibility for their respective populations, as well as overcoming historical challenges such as Zimbabwe’s hyperinflationary past and Nigeria’s struggle with corruption and financial inclusion.”

Author

  • Tom joined The Fintech Times in 2022 as part of the operations team; later joining the editorial team as a journalist.

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