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Paddington Masamha: Bond note value destruction and price erraticism in #Zimbabwe – Part 1

By Paddington Masamha

The Zimbabwean economy is encumbered with the financial whirlwinds of value destruction and price erraticism. The economic dashboard is signaling a tumultuous and turbulent economic environment for the largely poor economic inhabitants. Burdened with varying economic perplexities; strikes, public protests and demonstrations have become the new norm.

A man wearing a hat decorated with worthless note bearers' cheques during a protest against government plans to introduce bond notes -- a local token currency equivalent to the US dollar, and unemployment on August 3, 2016 in Harare. (ZINYANGE AUNTONY/AFP/Getty Images)
A man wearing a hat decorated with worthless note bearers’ cheques during a protest against government plans to introduce bond notes — a local token currency equivalent to the US dollar, and unemployment on August 3, 2016 in Harare. (ZINYANGE AUNTONY/AFP/Getty Images)

Antagonized with only red flags, individuals and corporates are demanding tangible transformations from the economic chauffeurs’ economic stabilization stratagems (particularly the President, the Minister of Finance and Economic Development and the Reserve Bank of Zimbabwe Governor). Following the recent fuel price protests which left some injured and unrecorded cases of lost lives; one needs an answer to gauge what is triggering such economic, political and social whirlwinds.

Regrettably, the Zimbabwean economic conundrums are primarily originating from the central government portfolios. The economy at large is subjugated by the episodic economic miscalculations of the fiscal and monetary authorities. Before we delve into the current financial currency crisis, a brief background to the current economic comatose will suffice. Fundamentally, the prime objective of the 2018 mid-term monetary policy statement announced by the Reserve Bank of Zimbabwe (R.B.Z) governor on 1 October 2018 was to ‘fine-tune the financial system in order to achieve the Bank’s mandate of maintaining price and financial stability which is the bedrock for economic development.’

In an endeavor to clearly corroborate the prime objective, the monetary policy statement was thus purposefully titled, “MONETARY POLICY STATEMENT: STRENGTHENING THE MULTI-CURRENCY SYSTEM FOR VALUE PRESERVATION & PRICE STABILITY’’. Though paramount, the principal objective of value preservation and price stability has been defied by the Zimbabwean economy. Empirical evidence instead spectacles a significant extent of value destruction and price variability.

Predominantly, economic and financial theories are hinged on the concept of ‘value.’ In the capitalist world; it is the importance, worth, benefit or usefulness of an object that forms its value. Therefore within the financial world, the real purpose of money is to save as a tool of valuation of goods and services as well as the valuation of assets. Practically, it is evident that the value of the bond note has been destroyed, though on paper the parity of 1:1 (between the bond note and the US dollar) is the officially recognized exchange rate.

Following the separation of the Nostro accounts and the RTGS accounts, the floodgates of value destruction and price variability were opened. Given the lack of confidence with regards to the MPS statement and Transitional Stabilization Programme (particularly the inconsistencies surrounding the assumed bond note/US dollar parity conditions and the gruesome transaction tax system), the Zimbabwean economy was in 2018 engrossed with unrestrained market reactions.

Particularly there was (and there still is, within the New Year; 2019) massive segregation of the bond note (as well as its associated RTGS balances, use of swipe cards and mobile money payments) as a mode of payment. Such currency segregation is simply reflected in business current pricing policies which are largely a reaction to the monetary policy regime. For instance, soon after the 2018 mid-term monetary policy pronouncement; within each industry’s value chain, circulars of price changes and or suspension of the acceptance of local RTGs, bond notes and Ecocash mobile payments were commonplace.

Barely a week from the monetary policy announcement and the fiscal authorities’ proclamation of the 2% per dollar transaction tax system, Zimbabwe was instantaneously engulfed with a serious economic crisis. At that time, following the move to separate the RTGS and Nostro accounts, it became unquestionable that the bond note had lost its value and traders were simply replicating the value destruction through erratic pricing and the segregation of the surrogate currency.

Following the acceptance by the Minister of Finance and Economic Development that indeed the resurgence of a boisterous parallel market could be a signal of a misaligned exchange rate, the ill-fated panic buying and price erraticism unfolded. Members of the general public stormed into supermarkets endeavoring to hoard and stockpile in their domestic pantries, storerooms and cupboards. On the other hand, faced with the gargantuan demand of their merchandise, a significant number of shops hiked their prices whilst concomitantly suspending the usage of electronic transactions (i.e. mobile money transactions and use of debit cards).

Those who defied the temptation of price hikes intelligently used public notices that professed that the business ventures were undergoing training, renovations and or stock take. Such publicity strategies acted as policy scapegoats to justify the random office closures. The government offices for utility bills such as electricity and water noticed an increase in cash inflows as people hurried to make advance payments (whilst indirectly dumping the bond note). The premium based companies also noticed an increase in cash inflows as subscribers hurried to pass risk to respective businesses.

In response to the crisis, government officials made public announcements which threatened to terminate the operating licenses of companies embroiled in the price erraticism and those indulging in any attempts to denigrate electronic payment methods. Regrettably, the use of command governance systems by a leadership purporting to be adopting liberal economic management systems is surely an unsustainable policy stance.

One month after the policy announcements, the economy at large had tangible evidence that the monetary and fiscal authorities would fail to sustain the 1:1 parity condition. In present day, there are significant sectors and income groups which are grappling with the bond note value destruction. For instance, pensioner’s monthly payouts have been significantly eroded. The few who are privileged to be employed are daily plagued with eroding values of their wages and salaries. Those who had accumulated some savings through official and unofficial (mattress savings) methods have bemoaned the government’s failure to preserve the value of their economic sacrifices.

Aggressively, the incomes of pensioners, entrepreneurs, savers, formally and informally employed economic inhabitants have plunged into an abyss. The financial challenge of value destruction is further compounded by the fact that the same meagre incomes (whose value has been destroyed) is chasing fewer goods and services, as well as being subjected to the horrendous transaction tax system.

Towards year end and the beginning of 2019, the Zimbabwean government was and is still faced with a potential health time-bomb given the poor doctors’ remunerations and poor health funding. An additional pool of disgruntled government employees are the teachers, whose union is believed to be one of the key figures which engineered the 2019 ‘shut down Zimbabwe’ campaign.

Whether employed, unemployed or self-employed; Zimbabwean parents are faced with despicably high school fees, punitive uniform prices and other essential back to school requirements. Having gone through a bleak Christmas Holiday, the majority of Zimbabweans are now head on with the commonly dubbed ‘January disease.’ Regardless of having tangible economic criticism against the fuel price increase, the writer in this article bemoans the timing of the increase.

Zimbabwe has in 2018 been saddled with price unpredictability, fuel shortages, basic goods shortages, liquidity crisis and the excruciating black markets. The year ended with a bleak Christmas Holiday. January 2019 ensued with various back to school vagaries, doctors’ and teachers’ strikes, whilst not forgetting the widely known ‘January disease’ effect. On the other hand, the leadership was silent about such problems. However instead of giving hope to a hopeless nation, the leadership announced further price increases. Besides the apparent disregard of the fuel price multiplier effect on value chain industries, the price announcement was ill-timed. What even infuriated the public is the realization that instead, government had indirectly increased taxes hiding behind a price increase. 

The basic economic prices of housing (rentals), transport (fares), insurance (premiums), entertainment (subscriptions), health (prices of medical drugs and medical consultation fees) are now astronomically high. The multi-priced economy is a confirmation of the current enigma of the bond note value destruction being heralded. It is suffice to posit that in 2018, only a few big corporations within the telecommunications, financial service sector, insurance and government controlled parastatals absconded the price erraticism bandwagon. However, within 2019 most of these corporations have already established means and strategies of collecting their incomes through foreign currency.

Government institutions themselves no longer openly accept the bond note. For instance, faced with an increasing demand for residential and commercial stands, the government controlled city councils have temporarily suspended the sale of stands (obviously citing reasons such as land scarcity but the inevitable reason being bond note value destruction). Hence, a willing buyer cannot purchase any land, unless if they resort to the usual unscrupulous illicit inducement shenanigans associated with public offices (hence increased fertile grounds for corruption).

Corporations which the government does not approve their proposed price increases are instead only trading through foreign currency (mainly the rand or US dollar) whilst some have significantly downsized production operations and the looming shortages are unavoidable. In 2018, private corporations adopted purchase covenants as a measure of controlling the distribution of scarce basic commodities (e.g. cooking oil, flour, mazoe orange crush etc.).

For illustration purposes, for a single client to purchase a 2 litre bottle of cooking oil in a major supermarket in the year 2018, the client was given a condition to purchase a basket of goods worth at least $15.00 to $20.00 (these were the general average purchase covenants or conditionality within the major supermarkets). The common purchase limitations of ‘one item per customer’ have also become conventional even with the less essential commodities.

At household level, given the stagnant incomes (salaries and wages, profits from informal trades), members of the general public faced with all these economic difficulties have been showing signs of financial depression. A family head’s financial plagues have been exacerbated by the landlords’ demands for rentals in foreign currency. The amalgamation of the costs of accommodation, transport costs and the basic goods and services has hemorrhaged household budgets.

Those who are formally employed find themselves paying medical aid health premiums but they later fail to access the subscribed health services. Most private health care providers have stopped accepting medical aid cards and thus households now pay more for medical health (i.e. medical health regular monthly premiums, medical health consultation fees and the cash purchase of drugs).

At national level, the Zimbabwean economy is in a quandary. Given the outrageously high discounts prevailing within the foreign currency parallel market, the current wave of price erraticism and value destruction has become an unpalatable financial position for all economic inhabitants. The 2% per dollar transaction system further fleeces the vulnerably poor populace. Without a doubt, both the fiscal and monetary authorities have failed the whole economy. The primary objective of their policies are good on paper but based on a misleading assumption that the bond note is equal to the US dollar.

In Zimbabwe, within the multi-currency regime, the taxman now demands payment of taxes in foreign currency. Through a public notice on tax remittances within the multi-currency system, businesses that are trading, withholding and collecting VAT, PAYE, Capital Gains Tax and other taxes ‘should remit taxes in the specific currencies in which they collect them without any conversion to RTGS, bond notes, local point-of-sale and mobile money’ is the exact directive from the ZIMRA public notice. 

Additionally, following Minister of Finance and Economic Development’s budget statement on 22 November 2018 ZIMRA now collects foreign currency from all the designated dutiable goods. Therefore, we have a tax authority which collects import duties in foreign currency whilst locally no single financial institution is officially circulating or trading such currencies.

To make matters worse, public and private sector institutions are paying salaries through the RTGS or bond note bank balances. As such the only available source of foreign currency supply is the parallel market. At the same time, any individual found guilty of trading foreign currency can receive a 10 year jail sentence.

Without quickly labelling this move by ZIMRA to collect foreign currency through foreign currency as double standards on the part of two government institutions (i.e. R.B.Z and ZIMRA), a brief financial history of the bond note suffices. The next publication interrogates further on the subject of how fiscal and monetary authorities have failed in their endeavor to achieve the ‘value preservation and price stability’ objectives. 

Paddington Masamha is an independent financial and economic analyst. You can reach him on email: [email protected] and on Twitter  @PMasamha