Is it really cost-effective for Zimbabwe to issue a gold-backed digital currency?

Zimbabwe, with a history of severe currency devaluation, has started issuing a digital currency backed by gold despite warnings from the International Monetary Fund (IMF). The first batch is valued at around 14 billion Zimbabwean dollars, approximately 12 million US dollars, in an attempt to stabilize the domestic currency devaluation crisis.

The World's First Gold-Backed Digital Currency

According to previous reports, Zimbabwe is planning to issue a digital currency backed by gold bars, with an estimated need of $100 million worth of gold to kick-start the project.

As reported by the country's media, Zimbabwe currently holds 350 kilograms, approximately $24.69 million worth of gold reserves. The country aims to increase its gold production by 14% this year to reach 40 tons. Data provided by Fidelity Gold Refineries indicates that the country's sole refinery made a profit of $377 million from gold production in the first quarter, down from $463 million a year ago.

The Reserve Bank of Zimbabwe has announced that they have received 135 applications totaling 14.07 billion Zimbabwean dollars to purchase gold-backed cryptocurrency, requiring 139 kilograms of gold support.

The minimum selling price for these digital currencies is $10 for individuals and $5,000 for companies and other entities. They can be stored in an e-wallet or e-gold card. The second phase of sales is set to follow shortly, launching on May 18th.

IMF Opposes Zimbabwe's Initiative

According to a report from Bloomberg, the International Monetary Fund (IMF) has cautioned against Zimbabwe's gold-backed digital currency plan, suggesting that they should open up the foreign exchange market to address macroeconomic challenges.

An IMF spokesperson stated:

Zimbabwe should undertake a careful assessment to ensure that the benefits of this measure outweigh the costs and potential risks, such as macroeconomic and financial stability risks, legal and operational risks, governance risks, and the costs of depleting foreign exchange reserves.

With Rising Gold Prices, Is Issuing Gold-Backed Digital Currency Cost-Effective for Gold-Producing Countries?

Amid the ongoing U.S. banking crisis, the Russia-Ukraine war, and persistent geopolitical risks, gold prices continue to hover near historical highs. Observing the international gold price close to $64,000 per kilogram, compared to Zimbabwe's issuance price of $68,800, there is a 7.5% premium. Of course, for a gold-producing country like Zimbabwe, the cost must be lower than the international price, which may even stimulate the domestic gold industry. However, considering the reported $100 million worth of gold needed to kick-start the project and Zimbabwe's current gold reserves of 350 kilograms, approximately $24.69 million, there seems to be much room for growth.

For more on gold, please see: What are the pathways for investing in gold as the price nears historic highs? What is a gold-backed stablecoin?