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Zimbabwe State of Economy: Zimbabwean currency is back

26.06.2019
Article from AFRIC Editorial
Following our recent article on Zimbabwe State of Economy published on the 13th of June 2019, another hubbub ensued as the nation of Zimbabwe woke up to the news of bringing the Zimbabwean dollar out of retirement. The effect of the Statutory Instrument 142 of 2019 is that from 24 June 2019 only RTGS dollars, whether in the form of bond notes or coins or electronic currency, are legal tender in Zimbabwe. All other currencies ‒ the instrument specifically mentions US dollars, British pounds, South African Rands and Botswana Pula ‒ are no longer legal tender. How ironic that the Statutory Instrument was being sold in USD.

The country has been indirectly moving towards this position since December 2015 when Bond notes and coins were introduced as an export incentive and later started working as ‘change’ since Zimbabwe, using multi-currency, had challenges for small denominated US notes and coins. Gresham’s law surfaced in no time as banks ceased dispensing American Dollars. Parallel market surfaced where one would get hard currency from the streets, at a premium. Central Bank maintained that the Bond note was at par with the American Dollars. Fast forwarding to October 2018, there was separation of bond notes and Hard currency but the rate was deliberately left at par despite the black-market rate of USD 1 :4 bond. That announcement led to the skyrocketing of the parallel market rate to 7 and within weeks, found its level at 4 hovered around the same rate for nearly four months to February 2019.

The business fraternity advocated for a formalised exchange market administered through the banks and their wish was granted in February 2019 when the government eventually gathered enough courage to admit that the local currency was not at par with the USD. It could have been an opportunity to eliminate the parallel market but government chose a rate lower than prevailing parallel market rates. The parallel market got a second lease and SI 142/2019 might spell further consequences. However, the market will make that determination

The interbank bank forex market kicked off at USD 1:2.5 bond. Unphased by this market, the speculative behaviour continued as the street rate started going up at an increasing rate.

Professor Mthuli Ncube the Finance and Economic Development Minister recently said price so of goods have fallen in real USD by 19%. Inflation, using conservative government figures, is around 100%. On average prices of goods and services have been hiked between five and tenfold using the local currency. It defeats logic to eliminate other stable currency and force a non-production economy to use a volatile and consistently downward trending currency. How does Bond notes store value when 1 million RTGS$ was USD 250 000 in the parallel market 6 months ago and is now around USD 100 000 if lucky.

Before we delve into whether it is the best decision, let us look at the precarious situation in which the Zimbabwean government had fallen into. Since the floating of the local currency, the exchange rate has slid from USD 1:2.5 Bond at initially floatation to 1:6.32 on 24 June 2019. It represents value loss of more than 66 percent on the official market and more value has been lost on the parallel market. Last week [third week of June 2019] the country witnessed the unprecedented proliferation of letters of incapacitation mainly from civil servants and quasi government institutions like Zimbabwe Revenue Authority and State Universities among others. In short, the economy was unofficially dollarizing.

A lot of critical goods like drugs, fuel and other items were increasingly becoming unavailable in local currency. Some property owners are now logically demanding rentals in foreign currency. A few weeks back it was reported that police officers in Victoria falls were kicked from their rented accommodation over failure to raise foreign currency. The story was refuted by the ministry of information and Publicity. The dollarization of the economy meant that government must start paying civil servants in USD. The funds that are not readily available. If government failed to pay its workers in foreign currency, it would create problems of civil servants who did not even afford basics like food and rentals. This would demotivate civil servants and in case of protests the military and security services could not be relied on. It is very difficult to keep hungry soldiers disciplined.

Its logical to conclude that the government has not introduced the Zimbabwean dollar it has just abolished the multicurrency in a bid cover up that civil servants are earning a currency that is not wanted. It is equivalent to forcing everyone to accept Zimbabwe dollar so that civil servants can at least buy. This supported by the fact that the Zimbabwean Dollar is made up of RTGS (electronic money in the bank) balances, bond notes and bond coins, all unpopularly known as RTGS dollars. The memory lane tells us that in 2009, the Zimbabwe dollar did not die because of a government declaration but because the market no longer had faith in it as a currency. Will a government declaration of its return as legal tender convinces the market to have faith in it?

What are the likely implications?

Already fuel, medical drugs, construction materials and other imported commodities were becoming available only to USD paying customers. The businesses were not necessarily greed they were hedging against a very volatile currency and eliminating the headaches of sourcing foreign currency. A lot of shops were also offering attractive discounts at an Implied rate of 40% more than the official rate. The continued use of multicurrency is somehow the reason why most shops and importers were still operating.

The removal of multicurrency regime means that some shops might close, unless the Finance Ministry has a solid fall-back position that does not take Zimbabwe to 2008. The fuel that was available on foreign currency might be soon disappearing unless government gets a bailout, even in that case it will not be long before the problems surfaces. On the foreign currency earners, it could create myriad of problems. Zimbabwe now relies on three principal sources of foreign currency each raking roughly a billion United States Dollars per year. These are tobacco, minerals and diaspora remittances.

Empty shelves in retail outlets is looming. Zimbabwe heavily imports basic commodities from neighbouring South Africa.

The inability to pay in foreign currency will mean that smuggling could resurface and hurt official export figures. This will further strain the ability to import. Diaspora remittances could be affected if government decides to change them forcefully at official exchange rate. There could be an increase of use of neighbouring countries like Botswana and South Africa for basic goods as Zimbabwe heavily relies on them.

In all this, the greatest error is the use of ambush prowling approach by the government. Policy inconsistence remains a major problem. How does a business that procured certain goods and products on the premise that they can easily recoup the USD or foreign currency suddenly deal with this situation? How does the insurance sector cope when /the whole sector was advocating for USD denominated policies for peace of mind to its clients? The implication could be worse to the insurance policy holder who could have sacrificed an arm and leg to secure the hard currency to settle premiums.

The parallel market for foreign currency exchange, basic goods is likely to grow in bounds. The smugglers are likely to be soon witnessing a boom in business.

What alternative did the Zimbabwe government had?

The USD was the preferred currency by most Zimbabweans but judging from the trade deficit that spiralled under that period plus liquidity crunch it has its own challenges. The talk of adopting the Rand albeit unofficial was another option that Harare has never warmed up to, it too has limitations.

Food for thought for Zimbabweans

The SI is not so far-reaching as its makers perhaps intended.  There is no law, yet, in Zimbabwe that requires prices to be marked up in legal tender or accounts to be drawn up in legal tender.

The instrument states that it is not intended to affect nostro FCA accounts and the use of foreign currency in those accounts to make payments overseas, nor does it affect the obligation to pay duties and taxes in foreign currency where required under the Customs and Excise Act and the Value Added Tax Act. This proviso could have been left intentionally and for strategic reasons.

The instrument has all the hallmarks of a hastily concocted measure to stop the downward spiral of the RTGS dollar against other currencies.  Whether it will have any such effect remains to be seen. Can it stem the tide or will it only get worse? How will the market react to this ambush announcement of this policy? This seem like a gamble option and if it does not work, the consequences will be unimaginable. We can only hope for the best…

Article from AFRIC Editorial

Credit image :google image/illustration

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