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IMF Warns Zimbabwe Not To Adopt Recently Launched Gold-Backed Digital Currency

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IMF Warns Zimbabwe Not To Adopt Recently Launched Gold-Backed Digital Currency
IMF Warns Zimbabwe Not To Adopt Recently Launched Gold-Backed Digital Currency

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Zimbabwe, a country in Southern Africa has been cautioned by the International Monetary Fund (IMF) to be careful with its newly launched gold-backed digital currency as a way of dealing with microeconomic challenges like the extremely high volatility of its local fiat currency.

Zimbabwe Floating Gold-Backed Digital Tokens in the Market for $10

According to the IMF, the Zimbabwe Central Bank should instead be focusing on liberalizing its foreign exchange market. The country’s regulator has from Monday been selling digital tokens to investors for 5$ for individuals while corporates and other institutions pay $5,000.

The African Development Bank (AFDB) says Zimbabwe’s economy had already been struggling to stay afloat before the COVID-19 pandemic hit. The country’s output declined by 6.0% in 2019 due to a variety of challenges such as economic instability, the elimination of subsidies on crucial commodities (maize meal, fuel, and electricity prices), reduced foreign exchange earnings, and a significant increase in the money supply.

Unfortunately, the arrival of the COVID-19 pandemic and the persistence of drought led to another harsh blow: a 10% contraction in the real GDP for the year 2020. The impact of this contraction was felt in the increasing inflation rates, which averaged 622.8% in 2020, up from 226.9% in the previous year.

After briefly declining in August 2022, inflation returned to triple digits in the country, according to a report by the World Bank. As mentioned above, this rise in inflation has been caused by an increase in the money supply and a surge in global prices.

The war in Ukraine has resulted in high food and energy prices, adding to the domestic inflationary pressures caused by the government’s loose monetary policy and quasi-fiscal operations.

In December 2022, annual inflation peaked at 244%, but measures such as monetary tightening, including a series of sharp interest rate hikes, and fiscal policy actions have helped bring inflation down to 230% as of January 2023.

Despite the modest decline, inflation remains at high levels, however, the Central Bank has decided to reduce the interest rate from 200% per annum to 150% in February 2023.

Why A Gold-Backed Digital Currency

The Zimbabwe Central Bank is caught up between a rock and a hard place, with the need to reduce reliance on the US dollar and an extremely volatile local unit.

That said, it is obvious a country in Zimbabwe’s position would turn to a digital currency as demand for US dollars surpasses the local currency and is by far preferred for making transactions.

“A careful assessment should be conducted to ensure the benefits from this measure outweigh the costs and potential risks including, for instance, macroeconomic and financial stability risks, legal and operational risks, governance risks, cost of forgone FX reserves,” an IMF spokesperson told Bloomberg on Tuesday in an emailed response to questions.

IMF Advises Zimbabwe To Consider Conventional Measures

Authorities at the global lender, headquartered in Washington have requested leaders in the southern African country to consider using known measures to address economic challenges plaguing the country.

The measures IMF is referring to range from maintaining a tight monetary policy position and a speedy liberalization of the nation’s foreign currency market which would encompass lifting restrictions on the exchange rate at which banking institutions, regulated dealers, and businesses transact.

The Zimbabwean currency depreciated by 40% in reference to the US dollar this year, with the official exchange rate at 1,070 and rates ranging from 1,500 to 2,300 on unofficial markets.

In the previous year, the International Monetary Fund expressed concerns over the Central African Republic’s decision to recognize Bitcoin as a legal tender. This decision was, however, reversed by the country within a year.

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