Reserve Bank of Zimbabwe battles cash storm

Reserve Bank of Zimbabwe

Bond notes would drive the greenback out of circulation

LAST week, soon after the Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, unveiled a raft of measures to deal with an accelerating cash crisis in the economy, social media was abuzz with jokes and taunts over plans for an injection of bond notes, a form of new currency that will rank pari pasu with the greenback, into the tottering economy.
As if warning Mangudya of the likely fate of the bond notes, a message on WhatsApp, an over-the-top messaging platform now commonly used by millions of Zimbabweans, went uncontrollably viral; it spoke about the Gresham Law, which was described as a monetary principle stating that bad money drives out good.
It’s interesting when Zimbabweans chuckle about their plight, with everyone jostling to give expert interpretation on economic situations.
After all, did we not all become economic experts during the Zimbabwe dollar era, that ill-fated period of hyperinflation characterised by the daily erosion of the domestic currency? It taught many Zimbabweans the kind of economics many international citizens would find difficult to decipher!
The WhatsApp message explained: “In currency valuation, Gresham’s Law states that if a new coin (bad money) is assigned the same value as an older coin containing a higher amount of precious metal (good money), then the new coin will be used in circulation, while the old coin will be hoarded and will disappear from circulation.”
Indeed, it was apparently a poignant warning to the RBZ governor that the bond notes would simply drive the greenback out of circulation, and that people would spend using unwanted bond notes, and keep the US dollar in their pockets.
If that were to happen, there would be shortages of more than just cash: Supermarkets would start experiencing a decline in stock, most of which is currently being imported; local producers would get overwhelmed by the bond unit, which every retailer would certainly seek to get rid of as quickly as possible by passing it on to the manufacturers of goods.
Since they are dependent on imports for raw materials, the manufacturers would get stuck with the bond notes, and may be forced to pay off salaries using the unwanted currency.
That could affect morale, and consequently productivity.
Critics are not convinced Mangudya’s latest measures will better the economy.
For many, the new measures spell doom for a country still trying to recuperate from the hyperinflationary crisis, which only worsened in 2008 but had ruined the economy since 2000.
Due to the lack of confidence in the bond notes, the market is likely to give it its own value apart from that assigned by Mangudya. This, inevitably, would drive the notes into a parallel market, creating exchange rate distortions between the official bond notes rate and that on the parallel market.
What this will mean is that, rather than saving, people will make sure they spend their little incomes as fast as they can, on goods, or buy the US dollar as they flee the bond notes as a store of value.
In other words, they will shift their wealth into hard currency and durable goods.
The market rejection of the South African rand is a good example; it has completely been driven out of circulation despite initially starting off competitively circulating alongside the US dollar upon dollarisation in 2009.
The rand has become increasingly volatile, and lost significant value in the past few years. This forced Zimbabweans to shift to the greenback, which has been strengthening, therefore giving real gains to holders of the currency.
There is no doubt Mangudya is genuinely concerned with the health of the country’s frail economy, but still, doubts linger over the commitment of the political establishment, especially given the recent public bickering within government over the country’s re-engagement with the international community led by Finance and Economic Development Minister Patrick Chinamasa.
It was clear to all that the public row between Indigenisation Minister Patrick Zhuwao and Chinamasa was hurting confidence and undermining the economy.
It took a public statement by President Robert Mugabe to stop the fight. President Mugabe admitted this had cost the economy significantly.
Fears are that the ruling party could capitalise on the situation by ordering massive printing of the bond notes, which they could use to liquidate corporate and individual accounts with US dollars.
The notes could also be used to pay civil servants salaries, departing from the RBZ governor’s plan for these to be used only for the payment of incentives to exporters.
Vince Musewe, the secretary for finance and economic affairs for the People’s Democratic Party, said Mangudya’s measures reflected “a desperate economic situation with nowhere to go”.
“Zimbabwe’s economy will have negative growth this year because we are not producing enough to meet our needs. That is the fundamental problem we have to address and nothing else.

Finance Minister Patrick Chinamasa and RBZ Governor John Mangudya

Finance Minister Patrick Chinamasa and RBZ Governor John Mangudya

“We are also not attracting the necessary investment capital due to the confusion created by the Indigenisation Act which is now being left to the President to interpret for us as he sees fit from time to time,” said Musewe.
He said despite Mangudya’s assurances, the country was “effectively going backward to foreign exchange and import controls but again we are using the wrong instruments”.
“If you restrict withdrawals or impose conditions on export earnings people will just stop using the banking system. It’s as simple as that,” he said, referring to withdrawal thresholds put in place by the RBZ as part of the measures.
Bankers said there was already a noticeable decline in deposits. Bulk clients had slowed down cash deposits as they mulled the new policy thrust.
One banker said they understood where the RBZ governor was coming from, but were not sure if Mangudya understood where depositors were also coming from.
“There is increasing scepticism,” he said, declining to be identified.
Apparently, Mangudya still had time to measure the reaction of the market to see if the latest policies would have stakeholder buy-in.
Already, he has started softening on a few policy measures — farmers’ withdrawal limits were raised to US$10 000 per day, from an initial limit of US$1 000, making them corporate clients.
A few more adjustments may follow, but the expectation is that he should deal harshly with known elements milking the economy of cash: Chinese businessmen crossing the border with bulk cash and depositing it with their country’s bank in South Africa.
So far, government and police have avoided arresting them on account of the fact that China is an “all-weather friend”.
But their friendly fire has been disastrous.
One banker said nationals from neighbouring Zambia, Malawi and Mozambique were also trooping into the country to get US dollars using international cards.
So, at some point, the RBZ had to act. But the question is: How?
What is clear is that current measures have already boomeranged.
But Mangudya believes his measures have been greatly misunderstood; he tried to impress upon the long-suffering population during a briefing of editors on Friday that the bond notes did not herald the dreaded comeback of the Zimbabwe dollar.
The bond notes, he said, had been introduced to stimulate production and exports, which would earn the country more foreign currency.
The bond notes were part of a structured export facility under which exporters would get a five percent incentive for exports, he said.
The bond notes, supported by a US$200 million African Export-Import Bank (Afreximbank) foreign exchange stabilisation facility, would only be used to pay exporters for the five percent bonus on exports, he said.
But the notes would be allowed to circulate in the economy once paid out to exporters, and would be redeemable from any bank on demand in US dollar equivalent by holders.
In his statement announcing the new measures, which he said were meant to deal with cash shortages while simultaneously stabilising and stimulating the economy, Mangudya said the cash crunch was due “to a number of intertwined factors”.
These, he said, included a dysfunctional multi-currency system in the economy caused by a strong US dollar.
“In the case of Zimbabwe, the US dollar has become more of a commodity, a safe haven currency or asset than a medium of exchange,” he said.
He said the low levels of use of plastic money and real time gross settlement (RTGS) platforms, which made the country a “predominantly cash economy”, had also precipitated the cash crisis.
The economy was also grappling with low levels of production to meet consumer demand, leading to higher demand for foreign currency to import consumer goods.
There was also low consumer and business confidence as reflected by the penchant to keep cash outside the banking system, said Mangudya, who highlighted that the economy was fraught with an “inefficient distribution and utilisation of scarce foreign exchange resources”.
He said a strong US dollar, now the predominant currency in the economy, had made Zimbabwe a high cost producing country; it had also become a very expensive tourist destination; a fertile ground for capital flight and externalisation; and highly dependent on the US dollar cash for almost all domestic transactions.
“The US dollar has replaced all the other currencies in the multi-currency basket, namely the rand, euro, the British pound, yuan, pula, Australian dollar, Indian rupee and Japanese yen,” he said.
Mangudya explained the adverse impact of these factors, which he said had “continued to put pressure on the country’s balance of payments position”.
“Whilst the country experienced balanced trade prior to 2003, as exports were aligned to imports, the situation changed from 2004. Since then, the country has continuously experienced trade deficits, which have increased from moderate levels of around US$400 million between 2004 and 2006 to the unsustainable levels of US$2,5 billion between 2011 and 2015. The persistent trade deficit has continued to drain liquidity or cash from the country,” he said.
Mangudya said the major sources of liquidity for the country were export of goods and services, Diaspora remittances, offshore lines of credit and foreign direct investment.
Of these, exports were the largest contributor to liquidity, with around 80 percent of exports or US$2,6 billion coming from five products, namely tobacco, gold, platinum, diamonds and ferrochrome.
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“Over 40 percent of Zimbabwe’s exports are to South Africa and around 60 percent of imports are from South Africa. Around 70 percent of tourists to Zimbabwe come through South Africa. As such, South Africa is an important trading partner to Zimbabwe and a major source of foreign exchange,” he said.
But he bemoaned the fact that currency utilisation levels under the multi-currency system had continued to be skewed towards the US dollar.
In fact, upon dollarisation in 2009, the South African rand competed favourably with the greenback on currency utilisation at 49 percent apiece, with other currencies accounting for two percent. By last year, the statistics favoured the US dollar at a currency utilisation rate of 70 percent, against 30 percent for the rand.
So far this year, the US dollar’s utilisation rate was at 95 percent, against five percent for the rand.
Other currencies had been completely obliterated from usage by 2013.

“Good and bad coin cannot circulate together”

“Good and bad coin cannot circulate together”

Mangudya said it was therefore important to restore “the fundamental principles of the multi-currency system through increasing the availability and usage of the other currencies within the multi-currency basket”.
“The multi-currency system was designed to minimise concentration risk of exerting pressure on one currency in an economy,” he said.
The governor may, however, have missed the fact that people will always seek safe haven investments.
To restore and promote the wide-spread usage of currencies in the multi-currency basket, Mangudya said 40 percent of all new US dollar foreign exchange receipts from export of goods and services, including tobacco and gold sale proceeds, would be converted by the RBZ at the official exchange rate to rands and 10 percent to euros.
“This policy measure is designed to ensure that we spread the demand for cash amongst a wide range of currencies and in order to mitigate against concentration risk,” he said.
He then announced that the central bank had established a US$200 million foreign exchange and export incentive “supported by the Afreximbank to provide cushion on the high demand for foreign exchange and to provide an incentive facility of five percent on all foreign exchange receipts, including tobacco and gold sale proceeds”.
But that facility would be disbursed using bond coins and notes “to mitigate against possible abuses of this facility through capital flight”.
“This facility shall be granted to qualifying foreign exchange earners in bond coins and notes which shall continue to operate alongside the currencies within the multi-currency system and at par with the US dollar,” he said.
“The Zimbabwe bond notes of denominations of US$2, US$5, US$10 and US$20 shall, therefore be introduced in future, as an extension of the current family of bond coins for ease of portability in view of the size of the US$200 million backed facility. The facility shall also be used to discount trade related paper in order to provide liquidity for business trading operations,” he said.
That decision triggered uproar from the public, with many fearing the RBZ was bringing back the Zimbabwe dollar through the backdoor.
Mangudya has sought to allay these fears, saying he personally would never wish for the return of the domestic currency, which was abandoned after being afflicted by an unprecedented bout of hyperinflation, which triggered widespread shortages in the economy.
Supermarket shelves became empty, and fuel was so much in short supply that President Mugabe had to personally embark on several visits to international allies for barter arrangements.
Zimbabwe did not have the foreign currency to buy the fuel.
At one point, President Mugabe had angrily admitted the fuel crisis and the economic ruin had caused him ulcers.
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