Bitcoin Could Solve Zimbabwe’s Hyperinflation Problem – Instead, Country Tells Poor Citizens To ‘Just Buy Gold’

It should come as no surprise that the country with the worst record of hyperinflation since World War II—Zimbabwe, whose local currency depreciated by 79.6 billion a month in 2008—has come up with yet another tough plan to put an end to it. economic problems.

The South African nation has started minting one-ounce gold coins – and it wants citizens to use them instead of US dollars.

“We know what you’ve been through in terms of the fear factor [the Zimbabwean dollar] lose value and that is why we are giving this gold coin,” John Mangudya, head of the Reserve Bank of Zimbabwe, told local media at an event introducing the Mosi-oa-Tunya coins, which are named after Victoria Falls, Zimbabwe’s most famous attraction. .

He argued that because gold is a store of value, the coins will ensure that Zimbabweans no longer have to “run to the parallel market in search of foreign currency”.

There’s a lot to unpack there, so let’s start with a quick refresher on Zimbabwe’s currency adventure:

• The Zimbabwe dollar was introduced in 1980 and has always been a poor store of value. It succumbed to hyperinflation in the first decade of this century, as incompetent and corrupt officials printed successively larger notes in a futile attempt to keep the currency alive.
• At the height of the crisis, the Reserve Bank of Zimbabwe pumped Z$100,000,000,000,000 notes into the economy. These notes were originally worth around $33 on the black market, but before long they didn’t even cover the cost of a bus fare in the capital, Harare. (Ironically, they now fetch US$200 each on eBay as collectibles).
• The face values ​​of the notes would have been even dumber had it not been for four “redenominations” of the currency – a process by which the central bank revokes circulating notes and replaces them with new ones with significantly fewer zeros.
• By 2009, no businesses would accept the Zimbabwean dollar, so the government stopped the money printers and allowed foreign currency such as the US dollar and South African rand to circulate. This unlocked a period of relative – albeit fragile – economic stability, and the Zimbabwean dollar was formally demonetized in 2015.
• To the delight of absolutely no one, it made a comeback in 2019 under the grand name of Real Time Gross Settlement (RTGS) Dollar. Three years later, this reincarnation has lost more than 99% of its value against the US dollar, and Zimbabwe is once again battling triple-digit annual inflation.

Against this pitiful backdrop, it is not so ridiculous for the Reserve Bank of Zimbabwe to promote an alternative currency that can act as a store of value.

Gold arguably fits the bill, due to its fixed supply and universal appeal in global financial markets. It is certainly a better store of value than the US dollar, which has weakened by 9% over the past year.

What doesn’t make sense, however, is why Mangudya believes that extremely high-value, non-divisible coins can somehow be used as money in an economy where the average citizen earns $230 a month. Any credible attempt to monetize gold in this way would surely have involved distributing the metal’s smallest practical denomination: one gram bars, worth about US$55 each. And even then, their usefulness in daily economic activity would be very restrictive.

The reality is that Zimbabwean officials have no illusions that Mosi-oa-Tunya coins are improving the country’s situation. Only 2,000 units are produced and almost no Zimbabwean will ever see one – let alone have the means to own one.

What want achieved is an unusually high markup of 16% for the coin’s producers. The Reserve Bank of Zimbabwe is pricing them at a 5% premium over the daily spot price of a troy ounce of pure gold, resulting in a launch price of $1,824. However, because they are only 22 carats – unlike most modern bullion coins – they actually contain only 0.9167 ounces of gold, giving an underlying value of $1,574.

In other words, Zimbabwe’s supposed monetary plan is to flog overpriced gold to gullible investors.

For anyone who has had the misfortune of dealing with parastatals in the country – as I have – this is as predictable as it is depressing. Zimbabwe ranked 157 out of 180 countries in the Transparency International Corruption Perceptions Index for 2021. Graft is endemic at all levels of the public sector.

Mangudya’s claim that the Zimbabwean dollar is weak because citizens are flocking to the US dollar – and that this could be reversed if they had gold instead – is patently ridiculous. The Zimbabwe dollar is weak because it is a fiat currency that can only hold its value if the people using it trust the issuer (the Bank of Zimbabwe) to manage the currency responsibly.

Unless they have been in a coma for the past two decades, no right-thinking Zimbabwean would be able to hold the central bank so high.

Let’s put money aside and consider what Zimbabwe’s government can do if it really wants to stabilize its beleaguered currency.

How to take back credibility

The first option is to embark on a long, painful journey of democratic accountability and economic reform. This means not only holding fair elections and electing noble leaders, but sweeping aside the legions of dishonest public servants motivated above all by greed. It goes well beyond the scope of this article – and my expertise – to suggest quite how this might be achieved. Suffice it to say that it is a gigantic task in societies where corruption has been completely normalized as part of public life.

The other, more pragmatic option is to remove the need for residents trust Reserve Bank of Zimbabwe by allowing them to do so confirm their claims and behavior. That means using independent third-party auditors to quantify reserves and scrutinize operating practices.

If Zimbabwe wants people to believe that the local currency has a stable supply, an external body should monitor and disclose all circulation of new notes.

The same is true if it wants people to believe that the currency is sufficiently backed by sovereign wealth: an external body should quantify and disclose the hard assets – gold, silver, diamonds, US dollars and other foreign currencies – held in central bank vaults.

Of course, all this can be achieved without mentioning the word “bitcoin”. But if Zimbabweans are serious about holding their government to account, there is no more powerful tool at their disposal. The Bitcoin monetary network uses blockchain technology (a military-grade form of encryption) to ensure that changes can never be made to transaction histories. The ledger is distributed worldwide and continuously verified by thousands of independent parties, guaranteeing total transparency and decentralization of data.

The Reserve Bank of Zimbabwe will tell you that bitcoin is a volatile, speculative asset that is a poor store of value. The first part is true: prices fluctuate wildly in the short term (as is the case, to a lesser extent, for gold: it fell from $1,921 an ounce in 2011 to $1,046 in 2015). However, the second part is not: when taking a long-term perspective, bitcoin has only ever increased in value.

That’s because bitcoin, like gold, has the magical combination of a fixed supply and strong global demand.

If the Reserve Bank of Zimbabwe were to convert a percentage of its assets into bitcoin, anyone on the planet would be able to verify the balance in real time at the click of a button. The value of these holdings will then grow over time, at least when measured against inflation-driving fiat currencies.

Back to Mangudya’s madness scheme, bitcoin again provides the sane way forward. Instead of asking citizens to buy goods with nuggets of gold that cannot be divided, he could promote payments with digital currencies – not just bitcoin, but also US dollar stablecoins – that are divisible to a fraction of a penny. They are also much easier to carry around, especially in mobile-friendly Harare.

Last year, El Salvador became the first country in the world to embrace bitcoin as a reserve currency and means of payment. The Central African Republic followed suit this year.

Time will tell whether they will be remembered as technological pioneers or financial lunatics.

Regardless, compared to the Reserve Bank of Zimbabwe’s latest move, bitcoin adoption is a shining beacon of maturity, democracy and progressiveness. The sooner Zimbabweans realize that, the better.