Is gold-backed digital currency what we need?

IN recent years, there has been a growing interest in the use of digital currencies as an alternative to traditional legal tender.

One option that has gained traction has been the use of a gold-backed digital currency, which has caught the attention of countries like Iran, China and Russia.

This type of currency would be backed by physical gold reserves, providing a level of stability and security that is not present in many fiat currencies, theoretically. In the past week, the Reserve Bank of Zimbabwe (RBZ) has reaffirmed plans to introduce a gold-backed digital currency as “part” of interventions to stabilise the local unit. In an inflationary environment, the economic impact of a gold-backed currency as a legal tender could be significant. Inflation occurs when the value of money decreases over time, leading to rising prices for goods and services. This can have a number of negative effects on the economy, including reduced purchasing power for consumers and increased costs for businesses.

This trend has been witnessed in Zimbabwe in the past three years. One potential benefit of using a gold-backed digital currency is that it could help to mitigate inflationary pressures.

Because the value of the currency would be tied to physical gold reserves, it would be less susceptible to fluctuations in market conditions or changes in government policy.

This could help to stabilise prices and reduce inflationary pressures over time. Another potential benefit is that a gold-backed digital currency could provide greater transparency and accountability in monetary policy. Because the value of the currency would be tied to physical assets, it would be easier for consumers and businesses to understand how monetary policy decisions are being made and how they are likely to impact the economy.

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According to the RBZ, the latest introduction is expected to compliment the Mosi-oa-Tunya gold coins as an alternative investment avenue.

The difference between the gold-backed currency and the aforementioned gold coins is in each of the two’s ability to be used as a medium of exchange. However, it is clear that the currency will serve relatively the same purpose as gold coins, but with better access by minorities who could not afford the “expensive” gold coins. The impact on the currency, therefore, can be forecast to be relatively the same. When gold coins were introduced, the RBZ succeeded in mopping out excess liquidity in the economy, which in-turn stabilised the exchange rate and inflation. However, a number of measures were also at play in curtailing inflation, which included a rise in borrowing costs.

Controlling money supply has, over the past year, proved to be the best solution to managing inflation.

The introduction of the digital currency as an alternative investment vehicle is expected to also mop out local currency liquidity to a certain extent, subject to available quantity. This will, in-turn, help stabilise Zimbabwean dollar inflation.

Since the RBZ abolished Zimbabwean dollar inflation statistics and adopted a blended model, it may be complex to measure the impact of the gold-backed currency on inflation.

It would be imperative, thereof, to monitor exchange rate movement on the parallel market since it is a clear reflection of the monetary policy stance. However, as Zimbabwe experiences record inflation rates, it is clear that the RBZ has no intention to bolster currency appreciation.

It is rather concentrating on a slow-down in currency depreciation. While this may be positive on the balance of trade since exports become cheap, the pay-off is reduced demand locally as disposable incomes remain subdued.

The country also has an underperforming industry and capital investment, which means export levels do not justify maintaining a weak currency.

Perpetual measures implemented by the RBZ to slow-down exchange rate loss should rather be channeled to ensuring a long-term currency stability.

Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — twdumah@gmail.com or tinashed@equityaxis.com, Twitter: TWDuma_