Zimbabwe is introducing local digital tokens in the hope of reducing reliance on the US dollar.
Starting Monday (May 8), Zimbabwe will circulate digital tokens backed by gold reserves that people can use to conduct peer-to-peer payments and transact with businesses, John P Mangudya, the governor of the Reserve bank of Zimbabwe, announced on April 28. International gold prices determined by the London Bullion Market Association will dictate the local pricing of the tokens.
Mangudya hopes the tokens offer an innovative new payment option to Zimbabwean citizens: “The issuance of the gold-backed digital tokens is meant to expand the value-preserving instruments available in the economy and enhance divisibility of the investment instruments and widen their access and usage by the public,” he said.
The tokens will be available to purchase via banks and transactions will be enabled through “e-gold wallets or e-gold cards” held by banks. There is a vesting period of 180 days, after which the tokens can be traded.
The minimum spend for individuals to purchase digital tokens is $10 for individuals and $5,000 for financial institutions, corporates and other entities, according to a May 4 press release by the central bank.
The alternative to the US dollar is a bid to shore up the country’s faltering currency, which is officially valued at around 1,000 Zimbabwean dollars for $1, but can sell at almost double the price in the illegal market.
A brief timeline of Zimbabwe’s currency collapse
1998-2007: Due to monetary policy mismanagement, Zimbabwe’s annual inflation rate hit 47% in 1998. Over the next decade, hyperinflation kept on getting worse. The government’s poorly implemented land reform initiatives stymied agricultural production, and a food supply crunch sent prices spiraling upward. The banking sector collapsed due to economic sanctions imposed by the US, European Union, and the IMF. Then, the Zimbabwe government printed huge sums of new bills to fund action in the Democratic Republic of the Congo, and underreported it, tipping the scales.
2008: Trust in Zimbabwe’s currency wanes as people see their pensions and savings wiped out by hyperinflation.
2009: Zimbabwe launches a 100 trillion Zimbabwe dollars banknote, worth around $33 in the black market. Shortly after, Zimbabwe is forced to scrap its own currency and start using the US dollar as legal tender. Under the multi-currency system, people also start using the Botswana pula (BWP), Indian rupee (INR), euro (EUR), and South African rand (ZAR). The local currency’s demonetization is complete by 2015.
October 2019: The government reintroduces a Zimbabwean currency and bans the use of foreign currencies for local transactions. But the black market thrived and the switch didn’t really happen. Eventually, the government lifted the ban on the US dollar.
July 2022: Zimbabwe launches 22-carat gold coins to be sold to the public to tame runaway inflation.
One big number: Zimbabwe’s peak hyperinflation
79,600,000,000%: Zimbabwe’s inflation rate per month at its peak in November 2008, which was essentially 98% daily. This is the second-highest hyperinflation in history. It’s second to Hungary in the aftermath of World War II, where prices doubled every 15 hours at one point as the government used inflation as a tax on its citizens to help pay its postwar reparations and make its payments to the occupying Soviet army, and to restore productive capacity.
Charted: The US dollar is still king
The move towards de-dollarizing
The US dollar has ruled global reserves for more than 80 years. That’s partially why it became a mainstay for a Zimbabwe-in-crisis. But several countries are trying to distance themselves from the currency to free themselves from ties to the US economy and financial system. Russia has promoted de-dollarization since the annexation of Crimea in 2014 led to sanctions. In light of the Ukraine war, the attempt has accelerated. This year, though, the calls for de-dollarization have grown louder and spread wider.
Brazil and Argentina have been weighing a common currency to reduce reliance on the US dollar in trade. India and Malaysia have agreed to trade in the Indian rupee. China and Brazil reached an agreement to settle trades in each others’ currencies. There’s chatter about Saudi Arabia, Iran, and Venezuela, agreeing to do select trades in Chinese yuan, too.
But breaking America’s currency dominance won’t be easy. The US dollar is inherently built for modern trade, given its structural strength, relative stability, the breadth and depth of dollar-denominated asset markets, and the continued reliance of developing nations on the US dollar inside their supply chains and asset bases. A switch, if at all, would take decades, even generations, economist Peter C. Earle wrote for the American Institute for Economic Research.
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