Zimbabwe Cash Crisis: An analysis of the real reasons behind
By Eddie Cross
At the beginning of this year the Reserve Bank suddenly imposed cash withdrawal limits on local bank accounts. The limit was US$10 000 a day. That may not be enough for Grace Mugabe, but for most of us it represented a ceiling so high that it made little impact. However, in the closeted halls of commerce, the signal was taken as the first shot in yet another crisis management effort by the authorities.
They were right. Cash withdrawal limits were steadily reduced until about two months ago they were set at $500 a day and in reality the markets had already taken control and most banks were simply unable to maintain even this new limit. Today the largest bank in Zimbabwe is restricting withdrawals to $40 a day and even then they run out of money. Queues stand silently outside all Banking Halls and ATM’s from early morning.
When we adopted the dollar and the Rand as our currencies of trade in February 2009 after experiencing inflation at world record levels, the needed cash to make the system work simply emerged and took over – in day’s fuel and food was in free supply after years of shortages. In weeks all retails stores were fully stocked and trade was brisk.
In the next 4 years under a Government of National Unity with an MDC Minister in charge of the Ministry of Finance, there were no cash shortages, fiscal discipline was maintained and the formal economy recovered by a factor of 14 in four years – State revenues rising from $280 million in 2008 to $4 300 million in 2013.
Then Zanu PF took back control of the State in July 2013 and suddenly our world began to fall apart – again. In weeks we went from a cash surplus in the budget to a deficit of $500 million. In months we saw state expenditure on staff costs rise from 60 per cent of revenues to 85 per cent. The following year the deficit in the budget expanded to a billion US dollars – repeated in 2014 and 2015. Like the days of reckless printing of money, the Government simply issued Treasury Bills.
This took billions of dollars out of the economy and replaced them with paper. Normally such paper has real value in an economy and are traded and regarded as a prime asset. In Zimbabwe they quickly lost value, firms selling them at discounts up to 40 per cent and then when they were presented for payment, the State simply rolled them over and issued new paper to replace the matured Bill’s. They were still held in balance sheets as an asset at full face value, but the reality was that unless something drastic happened to get the country back on its feet, they were nearly worthless.
At last the markets said enough is enough and stopped buying Treasury Bills. It shows us that this is really a “command” economy that they were able to get away with this exercise for so long. So, rather than get the fiscal deficit under control, the State simply raided private bank accounts through the nostro accounts that support the interbank transfer system.
In the past 10 months they have taken nearly a billion dollars out of the system – a private money to which they have no right at all. As a result the open market system established with such success in the GNU has collapsed, we are back to exchange control and restrictions on imports. Prices are rising as a consequence.
To support the new controls and make it possible for them to manage foreign exchange markets, they have been taking $200 million a month from exporters accounts and replacing these funds with fake dollars via the bank transfer system (RTGS). An academic at Wits University in South Africa called these funds “RTGS dollars”.
In taking all these emergency measures to fund the deficit in the budget, the Government has put the whole banking and financial system under pressure.
Balance sheets are burdened with worthless Treasury Bills and the burden of funding the cash withdrawals from the RTGS system rests solely with the Banks and now the Reserve Bank is making electronic transfers of funds in various guises to the Commercial Banks and transferring to the banks the responsibility of paying out to their clients, real dollars or Rand in recognition of the balances in their accounts.
The country is converting to plastic money with the widespread use of debit and credit cards, but this is also simply resulting in the massive build up of bank balances, expressed as “US$” but which in reality have no backing or convertibility. Every dollar withdrawn from an ATM simply makes the situation worse, like a pyramid Scheme; this must eventually simply collapse in a heap and will leave millions of Zimbabweans destitute and bankrupt.
Then they issued a statement on the 4th May 2016 that the Reserve Bank was going to reintroduce a local currency alongside the currencies being used for market transactions. A year before they had introduced local coinage with a face value as US dollars – these were accepted and made a significant contribution to liquidity and market transactions. However paper currency is quite another matter.
What has annoyed me is the pretext that somehow these new notes will be backed by a US$200 million facility provided by the Afroexim Bank of Egypt. This was a pure fiction – no such facility was ever established and in more recent statements this aspect has been abandoned. Then they claimed that the new currency would only be used to pay a phantom “incentive” to exporters.
Suddenly exporters started to receive an electronic transfer of “funds” from the Reserve Bank. Their own bankers said they had no idea what to do with these “funds” and opened a suspense account to hold them – expressed as US$. I assume accountants added these funds to the balance sheet and the Commercial Banks hoped that no one would ask for payment from these accounts in real money.
How the State is accounting for these funds is a complete mystery to me. What on earth would they call them and where did they come from? Does this ridiculous exercise simply increase the monthly fiscal deficit?
But of course the real purpose of the new currency was to provide liquidity in local markets – like bond coins. To do so they have to be issued – not as electronic transfers but as real money in paper form. At first they claimed the new currency would be printed in Germany as if, somehow, this would add real value to the paper and ink. That was quashed by the German Government who simply told the company that under no circumstances were they to work for the Zimbabwe Government.
So we went ahead and printed the new currency in Zimbabwe – in the Reserve Bank which has a superb, state of the art printing facility in Harare. Having printed the new currency, the problem was then how to issue it without causing mayhem.
So now we have a very elaborate dance going on, led by the Governor and claiming that the new currency will start to come out in small denominations – so small they will not make any difference.
Well that is the main point – the new currency will not make any difference, it will only make matters worse. More paper circulating that has no backing and cannot be used in real markets. Just another burden on a bank system that is now perilously close to complete collapse.