Is it a good idea to use a digital currency?

The Reserve Bank of Zimbabwe (RBZ) will soon introduce digital tokens backed by gold as legal tender.

The move is meant to stop the decline in the value of the Zimbabwe dollar and safeguard the purchasing power of the populace,

But even though this new currency may lessen Zimbabwe’s reliance on the US dollar and possibly reduce exchange rate volatility, many people think it won’t be sufficient to address the country’s ingrained economic issues.

The central bank has instead chosen to launch its own gold-backed digital token in an effort to rescue its battered, inflation-ridden currency against this desperate background.

The government has used gold in the past to relieve pressure on the weak currency situation in the nation. Additionally, the central bank issues gold coins, which it uses to absorb excess market liquidity.

The exchange rate has been severely damaged by excess liquidity, which has also skyrocketed inflation.  In his mid-term monetary policy, central bank governor John Mangudya stated that continued adoption of the digital dollar is therefore anticipated to sustainably anchor inflation and exchange rate expectations.

Mangudya said the digital dollar has since demonstrated to be a useful tool for monetary policy and has a strong potential to contribute to the short-term return of normalcy to the domestic financial and capital markets due to their effectiveness in mopping up liquidity.

In addition, the divisibility nature of the digital gold tokens conforms to the national objective of leaving no one and no place behind in national development initiatives.

This is again in line with the bank’s longstanding commitment towards financial inclusion as it enhances access and affordability for a wide cross-section of economic agents across all income brackets.”

The latest move comes in the midst of extremely high inflation. Zimbabwe’s annual inflation in July eased to 101.3% from 175.8% in June.

Analysts said the inflation rate, which represents the pace at which prices rise, is still high.

High inflation causes a reduction in the value of money, which can be translated as a decline in purchasing power over time.

High inflation rates result 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 move to introduce a digital dollar , however, is an interesting approach by the RBZ.

However, the International Monetary Fund has expressed concerns about the potential depletion of the country’s gold reserves.

It also comes at a time when many people want to exit the Zimbabwe dollar, converting the local currency to foreign currency, especially the American dollar to store value.

 

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