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Paddington Masamha: Shortcomings and inconsistencies of the monetary regime in Zimbabwe

By Paddington Masamha

The Zimbabwean monetary landscape has entered into a new financial locus. Through his 20 February Monetary policy statement, the Reserve Bank of Zimbabwe Governor has ‘with immediate effect’ transfigured our monetary system.

The Reserve Bank of Zimbabwe (RBZ) Dr John Mangudya
The Reserve Bank of Zimbabwe (RBZ) Dr John Mangudya

Driven by the desire to maintain foreign currency market stability, the monetary authorities established ‘… an inter-bank foreign exchange market in Zimbabwe to formalise 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…’

The landmark monetary announcement basically imply that Zimbabwe now has a currency dubbed the RTGS dollars. Principally, the RTGS dollars is a term used to describe RTGS balances, mobile money, bond notes and coins. In the Governor’s words, the RTGS dollars thus become part of the multi-currency system in Zimbabwe.’

It is imperative to mention that the monetary authorities did not per se publicly announce that Zimbabwe has a new currency but the implied meaning of their monetary broadcast is that of a ‘new currency introduction.’ As admitted by the monetary authorities, the ‘RTGs dollars’ were now the dominating currency of trade and the Governor is simply rubber stamping the market signals.

The current 2019 MPS is an “establishment of an inter-bank foreign exchange market to restore competitiveness.” One chief positive achievement by the monetary authorities is the acknowledgement and acceptance of the real problems on the ground.

The MPS Section One (1), is a public acceptance of the national outcry which l have dubbed in one of the previous articles as Bond Note Value Destruction and Price Erraticism.

Presently, the monetary authorities acknowledge the existence of ‘an inflationary environment’, ‘a multi-tier pricing system’, and the counter-productive ‘foreign exchange premiums on the parallel market which ranged from 1.40 to 1.80 to the US dollar in September 2018 increased to the current levels of between 3.00 to 4.00.’

Contrary to their previous rejection of parallel market developments, the monetary authorities have publicly accepted that, ‘the majority of transactions in the economy are now largely being conducted in electronic money and bond notes at an implied parallel market exchange rate of around 3.0 to 3.5 to the USD.’ Their current acceptance just merely suggests how the leadership’s stance of only accepting market realities whenever the scenario suits their new policy direction.

In order to justify the unpegging of the illusory 1:1 parity, the MPS statement specifically states that, ‘continuing to use the USD as a unit of account in the economy, when its value has drifted away from the value of the RTGS denominated money supply has brought forth a number of challenges.’

The inevitable challenges which are a direct result of the bond note introduction are, ‘multi-tier pricing by business, speculative pricing, loss of government revenue, valuation and accounting difficulties, asset-liability mismatches and negative investor confidence.’

Vehemently, the MPS statement makes a public declaration that, ‘the export incentive scheme has been eroded by the forex premiums induced inflation.’

This is rather an interesting section given that at the time of the bond note introduction, the Governor publicly declared that he was going to resign if ever the bond note fails. This is an open integrity challenge to the governor. His February 2019 MPS unambiguously heralds the bond note failures, hence Zimbabwe is eagerly waiting for the ‘resignation episode.’

In October 2018, the MPS statement aimed at, ‘strengthening the multi-currency system for value preservation and price stability.’ This was deemed achievable through maintaining the 1:1 parity peg but drastically separating the bank accounts into NOSTRO FCAs and RTGS FCAs.

Furthermore, the fiscal authorities amended the monetary positions by declaring the foreign currency payment of selected imports and the requirement that companies pay taxes in the currency of trading. Fundamentally, these developments opened floodgates of value destruction and price instability as opposed to the 2018 MPS main objective of ‘…value preservation & price stability…’

As such, approximately after 4 months and some 20 days, the lid is off. However, the monetary authorities misconstrued the proposed market solutions. In their view,  the Reserve Bank has, ‘…taken note of the excellent contributions from the business community, bankers, the academia, the media and members of the public on the need to establish an inter-bank foreign exchange market…’ In my view, this is a contrary position to the one industrial analysts have always advocated for.

Instead of making the RTGS dollars as a pricing currency and hence indirectly an additional currency within the multi-currency system, my independent suggestion has always been (i) bond note demonetization (ii) full dollarization (at least in the interim period) and (iii) new currency (as a long-run solution but having accumulated enough reserves, resuscitated industrial production, dealt with systemic corruption, cronyism, nepotism and fully erected the necessary political reforms which guarantee fiscal discipline and ensure the avoidance of the recurrent deficits and the usual temptation to print money which is hyperinflationary).

Certainly, the precise problem diagnosis has been done but the proposed solution is not only ill-timed but likely going to create cataclysmic economic scenarios (obviously because of poor political reform, persistent corruption, cronyism and imminent state capture concerns).

Interestingly, Zimbabwean fiscal and monetary authorities have historically lagged behind market developments. As such, a greater majority of most policy prescriptions are largely reactive rather than proactive.

For instance, most of Gideon Gono’s currency devaluations were reactive and usually adopted when the parallel market had long eroded the then Zimbabwean bearer’s cheque purchasing power.

A similar scenario is also largely noticeable on the credit give to the former Minister of Finance Patrick Chinamasa for formalizing the multi-currency system in 2009. The adoption of the US dollar in Zimbabwe backed by a basket of other trading currencies was only a formal announcement by the then finance minister but the economy had on its own dollarized.

In a similar fashion, the current Reserve Bank Governor has simply formalized a parallel market position that has been dominating economic transactions. Basing on historical trends and government’s insatiable desire for command governance systems; the monetary authorities have once again opened a new currency crisis water gate. Before one can discourse the future currency outlook, a brief history of the monetary regimes shortcomings and inconsistencies will suffice. 

Bond note introduction and Afreximbank facility: Was the facility a window dressing exercise?

The Zimbabwean current monetary developments are empty without a brief history of the bond notes and coins. The multi-currency system was adopted when Zimbabwe had a record breaking hyperinflationary environment.

However, given the nature of how the economy was dollarized; Zimbabwe could not officially get access to the smallest units (i.e. coins) of the US dollar. This was however to the best of my knowledge a public excuse that government used in order to find a monetary loophole to print its own currency.

Having survived for a number of years through the massive printing of money to sustain its unsustainable borrowings, the multi-currency system (without the surrogate bond notes) did not have any loophole for monetary authorities to print money.

However, driven by the desire to regain the lost political mileage the ruling party ZANU PF shunned the ‘eat what you kill’ fiscal stance which had been instituted by the former Government of National Unity (GNU) Finance Minister Tendai Biti and adopted the rapacious fiscal system of ‘eating what you have not produced.’

The resurgence of the over reliance on the overdraft facility and an insatiable appetite for financing of the counterproductive quasi-fiscal activities largely explain the current conundrum of having an unsustainable budget deficit.

The August 2014 MPS made an announcement that the government had intentions to introduce bond coins so as to militate against the indivisibility of the US dollar. The initial batch of bond coins were issued in denominations of 1c, 5c, 10c, 25c and 50c.

As per the RBZ press statement, the coins were officially in, ‘circulation starting 18 December 2014’ but the 50c coins were going to be, ‘released into the market in March 2015…’

From the face value, this move appeared to be targeting the divisibility challenge as the press release reported that the bond coins were, ‘…introduced to buttress the multiple currency system through the provision of change especially for the US$ notes which have a smallest denomination in circulation in Zimbabwe of US$1.’

After approximately 1 year and 11 months, a new wave of the surrogate bond notes were introduced. However, this time around the divisibility argument could not hold water and thus monetary authorities had to find another financial loophole to justify their surrogate currency introduction.

The bond notes were introduced on the 28th day of November 2016, ‘…in small denominations of $2 and $5 to fund export incentives of up to 5% which will be paid to exporters of goods and services and diaspora remittances,’ as advised by the Reserve Bank of Zimbabwe’s press release.

Notably, the new justification for the new currency was thus the desire to incentivize exporters. The press statement unequivocally stated that, ‘the banking public is advised that no new accounts will be opened as the bond notes would be deposited into existing US dollar accounts…’ Barely, 22 months later; this public commitment was however violated by the 1 October 2018 MPS which separated Nostro from RTGS denominated accounts.

In practice, the market in the interim period could not readily accept the surrogate currency. A number of independent analysts, academics, business leaders, activists among others protested the move, both pre and post surrogate currency introduction. The most popular voices largely came from Tendai Biti, and social justice activists Evan Mawarire and Fadzayi Mahere.

In some circles, the public contestations were labelled political grandstanding moves by the opposition party, whilst on the other hand, the Governor took time to listen to the public concerns which were raised by Evan Mawarire and Fadzayi Mahere. Sadly, the genuine concerns were ignored and instead the surrogate currency was introduced in full force.

Since its introduction in December 2014 till February 2019, the 1:1 parity peg has been upheld. The usual public concern was that the bond notes were just a mere paper and not backed by any form of foreign currency or gold reserves. In response however, the RBZ governor endeavoured to establish public confidence in the monetary system by making a public declaration that the bond notes and coins were backed with an Afreximbank foreign currency facility.

However, this researcher has always questioned the public accounting of this financial arrangement. Emanating from an accounting standpoint, any financial transaction is in principle required to go through the double entry system.

As such, assuming this publicly declared transaction was not fictitious; the Zimbabwean national income accounts should from 2014 be required to report the loan facility (together with the concomitant loan repayments).

On the other hand, the balance sheet (statement of financial position) of Afreximbank should then report the loan facility to Zimbabwe within their published financial statements.

Evidence from the publicly available reports generally demonstrates that the Afreximbank loan facility has not been transparently reported. Within most public circles, members of the general public have largely questioned the transaction and hence the public discourse has propagated the transaction as a ‘financial heist.’

Given that the bond coins were introduced from December 2014 to date (and being deemed to be at par with the US dollar given the Afreximbank loan facility), it is a matter of public interest that the RBZ governor should have publicly reported on this financial transaction.

Usually, window dressing schemes (idiomatically known in financial literature as financial shenanigans or gimmicks) are common within the private and public sector firms and hence less likely to be a common scenario found in national income accounts. In the interest of restoring public confidence and credibility to the current monetary regime, the monetary authorities should openly report and account for the loan facility.

Recently, the RBZ Governor announced that Zimbabwe owes Afreximbank $641million during the Public Accounts Committee meeting. However, in a post breakfast meeting held in Harare after the 20 February MPS, the governor openly said, ‘…we only have $437 million of bond notes.’ Basically, bond notes had a 1:1 parity position because of the Afreximbank loan facility.

The pre-eminent question to pose is, why are the holders of $437 million of bond notes (which in my assumption are backed with the $641million Afreximbank) now subjected to the free-floating system? The governor publicly maintains his stance that bond notes have not failed. Therefore, the only evidence which proves his position is the 1:1 parity, unless the public statistics which have been tabled are not the accurate positions.

Conclusion

Policy inconsistencies and irregularities inevitably form the fulcrum of the nation’s economic and political history. Zimbabwean monetary authorities have historically short-changed the masses through abrupt policy shifts. Like the yesteryear experiences of currency devaluations; the monetary authorities in Zimbabwe have indirectly introduced a new currency dubbed the ‘RTGS dollar.’ Without a doubt; pensioners, savers, investors, entrepreneurs, employees and members of the general public have been robbed of their hard earned incomes or earnings.

What started off as an attempt to resolve the Zimbabwean US dollar ‘indivisibility concern’ has now delved into an ‘implied local currency’! The divisibility scapegoat gave birth to the RTGS dollar.

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