PHILLIMON MHLANGA
The Reserve Bank of Zimbabwe (RBZ) has begun a dry-run to test the feasibility of a digital currency backed by gold that will be accepted as a legal tender for peer to peer and peer to business transactions in an effort to preserve value, Business Times can report.
Nebson Mupunga, director of economic research and policy implementation for the RBZ, said the central bank was about to introduce the digital dollar for use in market transactions.
This is the most significant step in the creation of the digital dollar.
According to Mupunga, Zimbabweans will soon begin transacting in the digital dollar backed by gold, a move that will stabilise the rapidly falling exchange rate.
“…We are at an advanced stage; we are at the testing stage now. Soon, we will allow the gold digital token to be used for transactions purposes just like someone buys foreign currency from the parallel market. But at the same time, we can transact with. So, the token is coming and will satisfy the same function,” Mupunga said.
The latest move comes in the midst of extremely high inflation. Exchange rate volatility played a significant role in driving annual inflation, which soared to 175.8% in June from 86.5% in May while monthly inflation raced to 74.5% from 15.7% in May.
The inflation rate represents the pace at which prices rise. This means prices are not rising as quickly as they were in May 2023 at 86.5% but increasing at an average rate of 175.8%.
Rising inflation causes a reduction in the value of money, which can be translated as a decline in purchasing power over time.
Surging inflation rates results in companies passing on those costs to their customers, a move which will adversely affect aggregate demand as many will struggle to afford higher prices of goods and services.
The Zimbabwe dollar is facing a tough time after losing more than 50% of its value against the United States dollar this year.
The Zimbabwe dollar, which now trades at ZWL$5 395.96 against the greenback, 15% stronger than its closing price of ZWL$6 326.59 seven days ago. Although the Zimbabwe dollar firmed 15% against the United States dollar in Tuesday trade at the weekly wholesale auction run by the Reserve Bank of Zimbabwe, its strongest level since June 27, the local currency took a nosedive since the beginning of the year, resulting in a surge in demand for the greenback. Consequently, a significant portion of domestic transactions is now conducted in foreign currency, highlighting the preference for stability.
In a bid to facilitate local transactions, the government will now introduce these digital tokens for transaction purposes.
The move, however, is an interesting approach. But the International Monetary Fund has expressed concerns about the potential depletion of the country’s gold reserves.
The country is also exploring other measures to stabilise its economy. It has kicked things off by scrapping the need for import licenses, allowing goods to flow into the country without any import duties or taxes. Also, the RBZ has increased interest rate to 150% from 140%, inflation remained one of the highest in the world.
Many people want to exit the Zimbabwe dollar, converting the local currency to foreign currency, especially the American dollar to store value.
Mupunga said: “We identified the drivers of exchange rate volatility, and we said one of the drivers is the store of value.
“Many people are converting local currency to foreign currency in a bid to store value. Then we said let’s come up with the product that can mirror the same characteristics instead of people going to buy foreign currency on the parallel market.
“We then came up with a product which has the same characteristics of foreign value in the form of gold digital token where holders of local currency liquidity can buy the token and that token will be able to preserve value.
“But over and above that we said let’s go to the next stage where we can use the token for transaction purposes. We are now at the testing stage where we then allow the token to be used for transaction purposes.”
