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Paddington Masamha: Struggle for currency stability in Zimbabwe: The life of RTGS dollars in the multi-currency basket

By Paddington Masamha

Zimbabwean foreign currency black markets have repeatedly destabilized the well-being of the formal economy. The unforgettable years of the former Reserve Bank of Zimbabwe (R.B.Z) Governor Gideon Gono’s hyperinflationary era is a quick reminder.

Paddington Masamha
Paddington Masamha

Having failed to learn important nuggets from the previous currency crisis whirlwinds, the nation has once again plunged into another currency quicksand. The Zimbabwean Central Bank’s 20 February 2019 Monetary Policy Statement openly chronicles the inescapable reality that the economy has capitulated to a speculative attack from the foreign currency parallel market.

John Slowman in his 6th Edition Economics textbook advances that; ‘An attempt by a country to peg its exchange rate is likely to have one of two unfortunate consequences. Either it will end in failure as the country succumbs to a speculative attack, or its monetary policy will have to be totally dedicated to maintaining the exchange rate.’

Regardless of having a myriad of stern warnings against the introduction of the surrogate currency, the monetary authorities went ahead and upheld a 1:1 parity peg between the US dollar and the bond note. This scenario created substantial opportunities for speculative currency trades, significant arbitrage opportunities and gigantic speculative profits; hence the burgeoning of a boisterous foreign currency parallel market.

Currency speculation has virtually been an unstoppable trade in Zimbabwe. Successful traders have attracted fancy names such as ‘cash barons, change money or the commonly known osiphatheleni.’ Without labouring with statistical calculations of their numbers, economic size and extent of economic influence; the underground currency speculators have grown immensely to influence monetary decisions of the nation.

Having migrated from the 1:1 parity peg to the newly adopted inter-bank exchange rate system; the main paramount question is whether the new system will outwit the currency speculators or instead create a worse off position than the one which existed during the pegged currency system?

Economic theory and real-world country case studies have projected a general conclusion that ‘any economy where different currencies co-exist, the probability of one or more currencies being subjected to a speculative attack are commonplace.’ Zimbabwean monetary authorities seem to be disregarding this fundamental currency argument.

Economist Sloman further accentuates that ‘…if there is a consensus in the markets that a currency will depreciate, there is little that central banks can do.’ Given the lack of trust and credibility challenges hounding the Zimbabwean financial system, the central bank’s quasi-free exchange rate system is likely going to hit a brick wall and instead incubate other market bubbles.

Monetary authorities, in their quest to stabilize the economy’s currency crisis have introduced the RTGS dollars into the basket of currencies that are reckoned to be legal tender within Zimbabwe. As such, the RTGS dollar is now the official new base currency (unit of account) replacing the US dollar. As such, national income accounts and company financial statements are now prepared and reported in RTGS dollars. 

The new currency auction system is poised to, ‘…bring certainty, predictability and functionality to the economy’s foreign exchange market.’ This is assumed to be attainable through solving the unit of account and valuation difficulties which existed since 1 October 2018.

The assumed positive developments include the increased foreign currency inflows within the formal foreign exchange market and the ultimate easy availability of the same scarce currency, increased investment inflows, value stability of the RTGS money and ultimate price stability, elimination of the multi-pricing system and the ultimate restoration of competitiveness.

Emanating from a balance of payments (BOPs) standpoint, the new currency measures are assumed to, ‘trigger an expenditure switching effect across the economy which will benefit local producers, thereby, limiting imports of consumptive goods and services.’

Additionally, the new monetary measures are expected to ‘encourage export growth as the market determined exchange rate improves external competitiveness of domestic producers that include tobacco and cotton growers.’ The main target of the monetary policy was thus aimed at reducing the economy wide price distortions and the hazardous parallel market currency trading activity.

The MPS viewed in its fundamental desire to eliminate the economy wide distortions and monetary regime anomalies appears significantly robust. However, the current market developments and past monetary failures are likely going to act against the progressive monetary intentions.

Basically, the masses have been shortchanged given that monetary authorities were originally advised against introducing the surrogate currency. Having suffered a speculative attack, the monetary authorities are now preaching the gospel of financial endurance and going through the painful transformation.

Significantly, the worrisome trajectory of monetary policy inconsistencies and sudden policy changes deserves some scrutiny. At the time of introduction, the bond note assumed a 1:1 parity peg with the US dollar. The monetary authorities gave a firm assurance that no new accounts would be opened to facilitate the deposits of bond notes.

However, on 1 October 2018; the Reserve Bank took a sudden policy shift by announcing a separation between Nostro FCAs and the RTGS denominated accounts.

Approximately four and half months later, the 1:1 parity peg was discontinued. This meant the RTGs dollar values had been devalued from their assumed 1:1 parity peg to the market determined rate which started off at 1:2.5 on the initial trading day.

Zimbabwean fiscal and monetary authorities are well-known for sudden policy shifts and raft changes. Historically, the prime cases of the former Governor Gideon Gono’s currency devaluations are a vivid reminder. Usually these sudden policy shifts are accompanied by slogans and mantras meant to cajole the masses into accepting the proposed new measures. The common ‘Zero to Hero’ mantra when Zimbabwe truncated a number of zeros on its currencies deserves special mention.

Often times in Zimbabwe, when the nation is plagued with the negative vices of bad economic and monetary choices; the usual scapegoat is sanctions, currency speculators, cash barons, economic saboteurs and obviously the commonly sung hymn of ‘regime change agents.’

The monetary authorities are in my view the main perpetrators of the current economic hurdles of short termism and the culture of banking in mattresses. The recurrent monetary policy inconsistencies have detrimental effects to the public confidence in the overall banking system.

Inevitably, the implied currency devaluation has triggered massive losses of monetary and financial value of people’s incomes. For instance; pension monthly pay-outs, personal savings, employee wages and salaries have been depleted.

The scenario is particularly worse for government employees. For instance, the 2019 budget was calculated basing on US dollar values. Just a month into the year, the government has suddenly devalued its own employee’s incomes by the prevailing auction exchange rate (2.5 at least in the interim period).

In this austerity era, the probability of government employees receiving commensurate salary increases is very bleak and if any, will not match the simultaneous currency devaluation.

The plague of income value destruction is not only with government employees. Openly, the system of salary negotiations in Zimbabwe goes through various National Employment Councils (N.E.C.) collective bargaining agreements.

Naturally, these NECs collective bargaining agreements (CBAs) have generally imitated the government salary structures with just a few variations. As such, one can firmly notice that the livelihoods of most Zimbabwean households are benchmarked on the government employees.

By and large, since the beginning of the year 2019; the Zimbabwean economy was largely engulfed with a ‘wait and see attitude’ mostly within the private sector. The vast majority of businesses were eagerly waiting for the MPS which was expected by end of January. The MPS announcement delays and the market speculations regarding the introduction of a new currency further gripped economic activity.

Business enterprises were faced with depressed demand, whilst some grappled with the foreign currency shortages and the inability to increase prices. As such, employees’ wages and salaries have remained stagnant whilst faced by the erratic prices which submerged the economy since the dramatic events of the 1 October 2018 MPS announcement.

As Zimbabwe is going through the economic recovery trajectory, one fundamental requirement is that of erecting a stable monetary regime. Unfortunately the current system is not in any manner based on realistic currency free trading ground rules, based on some fictitious valuation system and the arrangement is a quasi-free floating exchange rate hence its sustainability is not guaranteed. Additionally, the banking public’s lack of trust and confidence in the financial system further cripples the potential to harness tangible amounts of US dollar deposits.

The massive underground markets within the economy will continue to buy and hold real currencies as opposed to holding on to the RTGS dollars. Ceteris paribus, assuming the exchange rate is real; why is the transacting public not allowed to pay foreign currency denominated transactions? why is it not permissible for an RTGS dollar holder to make transactions in South Africa, Botswana, etc.? Surely, what kind of an exchange rate is deemed to be valid and realistic only within the Zimbabwean borders and is non-existent anywhere else!

Currently, the RTGS dollars are very strong compared to regional currencies which are part of the Zimbabwean multi-currency basket.

For instance, as the RTGS dollar exchange started trading at 1US$:2.5 RTGS $, the South African rand is trading at an estimated range of 1US$:13,50ZAR to 1US$:14,50ZAR.

The same comparative analysis can be done to the Botswana pula whose exchange rate value ranges between 1US$:10,00BWP to 1US$:11,00BWP.

Given that the two regional economies have comparably superior monetary policy regimes and their values are largely based on real economic fundamentals, one would not be wrong to question the basis of the RTGS dollar exchange rate with the US dollar.

The inter-bank foreign exchange auction system is based on, ‘…the trading of RTGS balances and bond notes with US$s and other currencies on a willing-buyer willing-seller basis through banks and bureaux de change…’ On paper, this new system is deemed to be a free-floating exchange rate system. However, it is important at this stage to notice that the ‘willing-buyer willing-seller’ is a financial fable.

The assumed supply of foreign exchange will largely come from the exchange controls (i.e. the export retention thresholds and the requirement that ‘…exporters shall be entitled to utilise their retained export receipts within 30 days …’). The supply of foreign currency is thus largely dependent on the foreign trade dynamics and the ultimate Central Bank exchange control progress.

The principal market concern within this new system is that the financial system is only accepting cash injections (i.e. physical cash deposits of foreign currency). However, any individual willing to buy US dollars at these current rates cannot do so because banks are currently not having positive foreign currency cash flow positions. This scenario is similar to the time period when bond notes (i.e. $2.00 and $5.00 notes) were introduced.

At that time, if someone deposits physical US dollar notes; assuming the same client intends to withdraw money an hour or a day after the date of transaction, the client could only access bond notes. Therefore, the current development is likely to remain unabated given the US dollar scarcity hence the creation of only ‘willing buyers and limited (if any) willing sellers.’ This currency crisis prediction is likely going to trigger further speculative attacks, arbitrage opportunities and ultimate currency instabilities. 

The assumption that the inter-bank exchange rate system will deal with the parallel market is rather largely questionable. Fundamentally, foreign currency black markets have always existed even in countries with stable monetary regimes.

For instance, in our neighboring South Africa and Botswana a certain degree of informal foreign currency trading is in existence. However, the size and extent of influence is so negligible to influence any government policies. Underground markets by their very nature cannot be completely extinguished.

Yes, it is permissible to posit that the parallel market trading activities will in the interim period diminish. However, it is noteworthy to state that the Zimbabwean foreign currency parallel market will remain burgeoning as long as the market distortions of having only buyers of foreign currency without having sellers of the same currency co-exist. Foreign currency black markets utilize such loopholes.

Fundamentally, as long as the RTGS dollar is still in circulation within the multi-currency basket; foreign currency black markets are unavoidable. During the lifetime of the multi-currency system (before the bond was introduced), foreign currency black markets were statistically insignificant.

However, the emergence of the surrogate bond notes was the prime breeding ground for massive illegal foreign currency trading. Hence, the easier solution to extinguish the speculative power of black markets is to demonetize the surrogate currency.

It might be too early to make financial predictions of the new system but for record purposes it is suffice to estimate that a significant number of businesses will remain charging their goods and services in US dollars, the probable alienation of the RTGS dollar is inevitable, the money printing machine will soon be functional, further RTGS dollar value destruction and ultimate inflationary spirals will soon emerge. Importantly, assuming ‘willing sellers (financial institutions)’ start selling USDs at these fictitious rates, a more robust speculative currency trading will develop driven mainly by foreigners in search of ‘cheaper US dollars.’

In a nutshell, once the financial system is disfigured with policy distortions and dramatic policy shifts; the integrity of the country’s monetary system becomes uncertain, deemed to brew another potential currency crisis and be more susceptible to recurrent speculative attacks. The primary objective of any central bank should be that of establishing a holistic monetary system that ensures that a country’s financial system is stable and operating as efficiently as possible.

The Zimbabwean monetary authorities should promulgate monetary and exchange rate policies which maintain the integrity and value of the national currency.

The current trail of overnight changes and shortchanging the masses through policy shifts is a negative blow to the desire for marketing Zimbabwe as a nation striving to be a safe haven and striving to be accommodative to foreign investments.

Paddington Masamha is an independent Financial and Economic Analyst. He can be reached on email [email protected] and Twitter @PMasamha