Zimbabwe, a nation familiar with economic challenges, is grappling with the slow uptake of its latest financial experiment, the gold-backed digital currency known as "ZiG." While this novel initiative was introduced by the government to wean the population off their strong attachment to the US dollar, it appears that Zimbabweans remain unconvinced.

The quest to reduce reliance on the greenback has been ongoing in Zimbabwe, but despite government efforts to promote local currencies, the US dollar continues to dominate transactions, accounting for approximately 80% of all financial activity in the country. This enduring preference for the US dollar has given rise to questions surrounding the feasibility of a gold-backed digital money, with limited interest from the general population.

The initiative has indeed seen progress in terms of technical infrastructure. Banks are now equipped to open accounts, facilitate interbank transfers, and offer card transactions using the new digital currency. However, the demand among ordinary citizens has been lackluster, as Lawrence Nyazema, president of the Bankers Association of Zimbabwe, observed.

Nyazema noted that the primary adopters appear to be pension funds and high-net-worth individuals with surplus Zimbabwean dollars. “I see more uptake by pension funds and high-net-worth individuals with excess Zimbabwe dollars than the average person who is struggling to make ends meet,” he said in a Tuesday interview, maintaining that a similar trend was observed with the introduction of the Mosi-oa-Tunya gold coins in 2022.

The gold coins, which the central bank began selling in July 2022, were also designed to diminish reliance on the US dollar. Nevertheless, their impact on shifting the currency landscape has been limited.

The introduction of gold-backed digital tokens and gold coins has faced scepticism from international organizations like the International Monetary Fund (IMF), which recommended a focus on liberalizing exchange rates instead.

At present, only 12 out of Zimbabwe's 19 banks are certified to conduct transactions with the gold-backed currency, according to Zabron Chilakalaka, the CEO of ZimSwitch, the national payments platform. The digital money is priced at $0.06 per milligram, with a minimum purchase requirement of $10 for individuals and $5,000 for corporates.

This financial experiment is being carried out against a backdrop of significant currency volatility. The Zimbabwean dollar has depreciated by over 170% this year, despite government assurances of its commitment to defending the local currency, unlike the situation in 2009 when it was abandoned.

Zimbabwe initially backed the gold tokens with nearly 140 kilograms of gold reserves to address the increasing demand for US dollars and the decline of the local currency. While this approach has garnered attention, the IMF has cautioned against depleting reserves and advised the government to consider a more flexible foreign exchange rate.

The gold-backed digital currency is just one of several measures aimed at stabilizing the Zimbabwean currency, which has suffered over 40% depreciation against the US dollar this year alongside soaring inflation. The introduction of gold coins and discussions about potential interest rate increases further underscore the gravity of the economic challenges faced by the nation.

Dr. John Mangudya, the governor of the Reserve Bank of Zimbabwe (RBZ), has asserted that the currency volatility is driven by the expectations of increased foreign currency supply. “What we have noticed is that demand for foreign currency, apart from being driven by the need to import goods and services in Zimbabwe, is also viewed as a store of value and we are addressing this demand by increasing the number of gold coins in the market,” he said.

The gold-backed digital currency represents a significant step in the government's strategy to leverage the country's gold reserves to stabilize the Zimbabwean dollar. It will be exchangeable for small quantities of Zimbabwean dollars, offering a means for citizens to store value and safeguard their assets from exchange rate fluctuations.

In conjunction with the digital tokens, the introduction of the gold coins in 2022 served as the initial step toward promoting the nation's gold industry and countering the devaluation of the local currency. This multifaceted approach aims to provide Zimbabweans with alternatives to the US dollar while simultaneously revitalizing the gold sector. However, fingers remain crossed as both initiatives continue to struggle with mainstream adoption.

The central bank, which received 135 applications valued at 14 billion Zimbabwe dollars ($12 million) to purchase the gold-backed digital tokens, intends to intensify efforts to drive a national, cross-sectoral uptake of ZiG by ensuring currency stability, the same feature of the USD that makes it dear to Zimbabweans.