The International Monetary Fund (IMF) has advised Zimbabwe to consider the potential risks to its economy before issuing a gold-backed digital currency. Zimbabwe’s central bank recently began circulating gold-backed digital coins in an effort to curb local demand for US dollars, which has caused the Zimbabwean currency to lose value.
Liberalisation of foreign exchange market proposed
Rather than resorting to gold tokens, the IMF has suggested Zimbabwe considers liberalising its foreign exchange market. The IMF has urged Zimbabwean monetary authorities to weigh the benefits of issuing a gold-backed digital currency against the risks to the economy.
Alternative solutions recommended
The IMF has also advised Zimbabwe to consider other conventional solutions, such as maintaining a tight monetary policy. The organisation’s warning is the second time it has cautioned an African country against adopting a non-conventional approach to currency management. In 2022, the IMF warned of the risks to financial stability when the Central African Republic adopted bitcoin, while similar warnings were issued to El Salvador after it declared bitcoin as legal tender.
Concerns raised over potential risks
The IMF has warned of the potential risks of gold-backed digital currencies, including macroeconomic and financial stability risks, legal and operational risks, governance risks, and the cost of forgone foreign exchange reserves. The unnamed spokesperson for the IMF has cautioned that Zimbabwe should assess the benefits against the potential risks before implementing such a currency.
In light of the IMF’s warning, Zimbabwean monetary authorities may need to reconsider their approach to currency management. Although gold-backed digital currencies may appear attractive, there are significant risks that need to be taken into account. By considering alternative solutions and taking a careful approach, Zimbabwe may be able to find a more sustainable way to manage its currency and strengthen its economy.