May 21, 2024

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Zimbabwe introduces a new gold-backed currency to tackle inflation Business and economic news

Zimbabwe introduces a new gold-backed currency to tackle inflation  Business and economic news

Zimbabweans have 21 days to convert their old money into new money, according to the central bank.

Zimbabwe's central bank has launched a new “structured currency” backed by gold, as it seeks to tackle high inflation and stabilize the country's long-faltering economy.

The new currency – called Zim Gold (ZiG) – will be backed by foreign currencies, gold and precious metals, John Mushayavanhu, governor of the Reserve Bank of Zimbabwe, told reporters in the capital Harare on Friday.

Muchyavanhu said ZiG will be traded alongside a basket of other currencies.

He added that the central bank will also offer a market-determined exchange rate.

“As of today… banks must convert existing Zimbabwean dollar balances into the new currency,” he said.

This step aims to promote “simplicity and certainty, [and] Adding “predictability” to Zimbabwe's finances, he introduced new banknotes that come in eight denominations ranging from one to 200 zigzags.

The new banknotes feature a depiction of gold bullion being minted, in addition to Zimbabwe's famous balance rocks, which have already appeared on older coins.

Mushayavanhu said Zimbabweans have 21 days to convert their old money into new money.

Reserve Bank of Zimbabwe Governor John Mushayavanhu presented the ZiG banknotes [Jekesai Njikizana/AFP]

Enough reserves to support the new currency?

The Zimbabwean dollar has lost nearly 100 percent of its value against the US dollar over the past year.

On Friday, it was officially trading at around 30,000 versus its coveted US counterpart – and at 40,000 on the black market, according to tracker Zim Price Check.

Its poor performance has contributed to the southern African nation's high inflation rate, which reached 55% in March, after rising sharply to triple digits last year, according to official data.

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The current rate of inflation has increased pressure on the country's population of 16 million, which already suffers from widespread poverty, high unemployment rates and severe drought caused by the El Niño weather pattern.

The price rise also brought back memories of 2008, when hyperinflation was so out of control that the central bank issued a $100 trillion note, which is now a collector's item.

Amid these economic challenges, analysts have questioned whether Harare has sufficient reserves to adequately support the new currency, and whether the latter may suffer from fluctuations in gold prices.

On Thursday, President Emmerson Mnangagwa inspected the central bank's vaults which Mushayavanhu – who was appointed earlier this year – said contained 1.1 tonnes of pure gold.

The bank also has roughly an additional 1.5 tons offshore, as well as $100 million in cash and precious metals — such as diamonds, which if converted into gold would account for another 0.4 tons, Moshayavanhu said.

In total, the reserves are worth $285 million, which Moshayavanhu confirmed “covers more than three times the ZiG token issued.”

At the same time, the central bank added that it will also adopt a tight monetary policy, linking money supply growth to the growth of gold and foreign exchange reserves.