Zimpapers Logo

Zimbabwe abandoned its currency in 2009 in favour of a basket of multi-currencies dominated by the United States dollar, to halt hyperinflation, which had rendered the local currency worthless. The country joined the likes of Argentina, Mozambique and Panama, which have all experienced a total collapse of their currencies. 

One of the potential solutions that have always been proposed to stabilise the economy is the introduction of a gold-backed currency. Last week central bank governor John Mushayavanhu introduced a new gold-backed currency called ZiG – “Zimbabwe Gold”.

The gold standard is a monetary system under which the basic unit of currency is defined by a stated quantity of gold. For every unit of currency issued, there is a corresponding amount of gold stored in a central bank. This system aims to provide stability and confidence in the currency, as its value is tied to a physical asset rather than the economic performance of a country.

Whereas, a gold standard system matches the quantity of currency in circulation, to gold reserves held at a central bank, with a fiat currency system, it is only the central bank officials who decide the quantity of currency in circulation. 

Gold

By adopting a gold-backed currency, Zimbabwe could potentially stabilise its economy. The value of the currency will be tied to gold, a tangible asset with intrinsic value, rather than the country’s economic performance. A gold-backed currency could also increase investor confidence. Foreign investors may be more willing to invest in a country with a stable, gold-backed currency, as it reduces the risk of currency depreciation.

Another advantage of the gold standard is that it will contain inflation through limited supply, and maintain a stable exchange rate. Under the current system of fiat money, especially through the introduction of the bond note, inflation has been difficult to contain as banks were under pressure to increase supply. The exchange rate has also been going up as more and more people try to get their hands on the much more stable currency in the US dollar.   

Countries like China, Russia and the US have been building massive reserves of gold. China is now the leading gold producer and currently, has the world’s fifth largest gold reserves. It became the largest importer of gold at 750 tonnes ,or 27 percent of global output in 2011.

Because gold continues to gain value as powerful countries buy more of the commodity, it only makes sense for the country to leverage on this, hence the argument for a gold-backed currency. However, the gold standard alone is not a panacea to Zimbabwe’s problems. Commitment to implementing sound economic policies, good governance and strengthening the independence of the Reserve Bank of Zimbabwe, are some of the paramount measures in support of the gold standard.