USD$500million loan: Why it wont work!!!

By Chenayi Mutambasere

So recently we have had another keep calm message and moment from our local Oxford University Professor Mthuli Ncube. He has or is going to draw down USD$500million to address the economic crisis he said recently over the past weekend.

The pertinent question on everyone’s mind is, “…what difference if any will this draw-down make to the lives of ordinary Zimbabweans?” To attempt to answer this question, let us consider the socio-economic history and current state in Zimbabwe.

The cycle of economic crisis in Zimbabwe is currently is on the main attributed to 2016 when the then Finance minister Patrick Chinamasa, recklessly withdrew funds from the Reserve Bank to pay off a huge part of Zimbabwe’s international debt. The minister hedged on the fact that if the debts were paid, this would stimulate the extension of credit lines from the IMF et.al.

But with ZANU PF proudly holding on to their corruption and human rights violation titles, this was not to be the case. Of course it never will be as long as it is ZANU PF.

Many of us in the diaspora watched a desperate Chinamasa with his begging bowl on Sky News many a time asking for money while praising Mugabe’s regime (oxymoron anyone).

What the minister should have known is that a country being in debt is not necessarily a bad thing for as long as it is sticking to the payment conditions and it is minimising on its own risk. Look at the biggest economy in the world, America, the country has been thriving on debt for decades owing trillions including to China its direct and immediate competitor but to this day, it thrives.

This own goal by Chinamasa cost the country something to the tune of $1.8 billion, almost the exact amount owed to the World Bank by Zimbabwe.

Put simply, if you and your household want to pay off a huge debt, you first put a plan in place before further bankrupting your family. You would either reduce spending or increase income but GoZ continued to spend on their frills amidst a struggling agricultural economy.

Infact Chinamasa literally went to the bank and demanded the money that was available from the banking corporation’s over night deposits, withdrew it all and off he went with it to pay off the debt.

The government continued to spend recklessly without any care including allowing the then president Robert Mugabe’s numerous hospital trips abroad amidst a wailing agriculture sector. Mugabe still makes these trips to this very day spending unbudgeted funds running into millions.

What ensued from this point was the biting liquidity crisis that became so bad that Zimbabweans queued for days to access a measly USD$50.

For this bad move alone we would be right to think that Chinamasa deserves to be given the doomsday legendary title, but ZANU PF being who they are, there is one born every minute such that there would be a long queue to choose from.

With the case in point we can assume at least two others would be vying for that title .

As the crisis worsened, ZANU PF did what they are famous for. In spite of the fact that at this point the economy was a USD economy, trusting citizens would bank in USD and rightly expect to withdraw in USD, a quite simple and logical expectation. ZANU PF proceeds to con the citizenry, by simply swapping the USD for funny money coined Bond Notes.

‘IT Will Work’ they said. The incumbent Reserve Bank of Zimbabwe governor John Mangudya guaranteed it would work claiming he would resign if it didn’t (maybe had he done so it would have been the only good thing to come out of this economic debauchery).

The governor proposed that he would print USD$200 million worth of this funny money which would in turn be backed by the Afrexim Bank (which Afrexim neither confirmed or denied).

Now keeping in mind that the money which Chinamasa grabbed from the coffers was UD$1.8bn, how then was $200million worth of funny money going to solve this issue.

Added to that, the idea of government bonds (bond notes) is a form of I owe you, it is government saying that I can’t give you your USD$100 that you deposited therefore I will instead give you this note that says I have your money, you can use this note to purchase and eventually I will pay back in hard cash whomever has this USD.

Not only did this fail dismally but to print 200 million to cover a $1.8billion hole was always going to be a tall order.

The idea of pegging the bond note to the usd as 1:1 became yet another way that the government syphoned more money from its citizens.

In no time had it been launched, money changers were already flooding the border posts .Similar to their GONO boys predecessors, the money changers had competitive black market rates in order to get hold of the hard currency. It was a matter of days if not hours that the 1:1 rate had fallen to the wayside.

The rate has gone up to as high as 1:7 bond notes to USD, a far cry to Mangudya’s promise to pay of 1:1 .

Invariably what this created were purchasing power disparities in the market. Of course someone who was willing to pay in USD got it cheaper than someone with bond notes.

Prices became inflated so that the bond note price would make it viable for the seller to part with their item in the hope that they could then buy back USD to replenish their stocks.

The inflated bond prices increased the demand of bond notes from the banks by its customers. Keeping in mind that supposedly only $200million was printed the liquidity crisis soon returned this time impacting both USD and the funny money bond notes.

At this time an emergence of telephone money and other plastic money services offered a somewhat temporary lifeline. So instead of keeping money in the bank or trying to find bond notes you transferred money to your phone and transacted on your phone. Great idea but liquidity crisis still made it difficult for banks to act with in the International Banking clearing system .

In turn this would mean that neither the plastic money nor the phone money could be used abroad. What happens with clearing – when you the customer present your card in a shop at that moment a call is made by VISA to your bank to check if you the customer has that money -the bank send back a yes, and money is transferred from the customer’s bank’s visa account to the vendor’ bank’s visa account. Your bank takes the money physically from your account and holds it in its current account to then replace the money it has paid to the vendor’s account.

What then started to happen with plastic money in Zimbabwe during international transactions was that while the bank would take money from the customer’s account they could not honour the transaction to the vendor’s bank because of accumulating debt on the banks visa account. International clearing demands hard currency not funny money. This accumulated huge debts for the Zimbabwean banking system.

In an attempt to solve this issue we welcomed another baby the Nostro accounts. These meant that customers could bank real money, I mean hard currency, no I mean USD making it easier for banks to discern payments. The Nostro’s could also be used abroad. What the citizens didn’t realise at this point was that in agreeing to a Nostro account it was RIP to any USD balances previously held in your other accounts.

At this point we became an economy with 4 methods of exchange (we can’t fully qualify all of them as currencies because you keep walking in one direction perhaps south of Plumtree and yeah toilet paper may be worth more there). So 4 methods of exchange telephone money, bond notes, usd and Nostro. All with different value dependent on how quickly the recipient wants to exchange them with the most internationally liquid being the more expensive ones.

So, while we are all wheeler dealing with money- prices in the most commonly available paper denomination that is bond notes continued to increase. Here I am saying the increase in price is a direct reflection of the devaluation of the bond notes, and the next one in line after them i.e. ecocash.

The increase in price, means increase amounts demanded from the banks at any given time. Increase in money demand from the bank means increased illiquidity by the bank and there we were starting back at one – no bond notes in the bank, limited bank balance transfers etc.

At this point due to the political crisis which manifested in the way of political violence, citizens being killed/maimed, falsely arrested and a captured judiciary. In this I mean the judiciary is capable of deciding in favour of a party due to that party’s political affiliation.

All of this coupled with the banking crisis continues to impact the economy in many adverse ways of which the top 3 are 1) No new Foreign Investment : an investor wants to know that their money is safeguarded if they are violated in any way they can go to the court and be protected by justice, 2) Zimbabwe Rating was in crisis it became more than blacklisted, international rating agencies delisted it so investors have no information on how worthwhile it is to invest in Zimbabwe 3) Reduced Fiscal Foreign Aid, so while Zimbabwe still receives foreign aid to specific non- governmental projects, the government does not receive direct aid neither can it apply for any in its current form.

So what about the new kid on the block ) Prof Ncube showing well and truly the ability to adapt and manage the Zim way. Decided to earn his stripes by delivery his own Zanuconomic Policies :
1- Have a baby of his own. In his last financial statement, the RTGS was birthed in words by the Prof. A new not new currency.

This enigma turned out to be the currency name for a bank to bank transfer by the customer. So you don’t have cash you want to move money around then use RTGS (bizarre right?).. It is also pegged in value against the USD and the rest of the babes on the shelf ecocash, bond notes (yep this baby still around), USD and Nostro. Recent reports are that some Nostro are also now RTGS too.

The RTGS was released under the guise of aiding those undertaking huge business transactions so that the RTGS is pegged at the market rate against the USD and as long as you have enough in your account you should be able to request the USD equivalent or at least undertake an international transfer.

But if you remember that we started this problem with a shortage of USD$1.8billion and so far nothing to increase cash in the economy has been done no matter what you call it there is no money in the economy that meets the demand for USD given the amount of foreign transactions the nation requires to undertake.

On realising the RTGS won’t work our Prof newbie has now said he has been given a loan (not sure whom by) to the tune of USD$500million so that businesses can access the money they need.

Will this work well to answer that question rewind to November 2016 when a US$200million was used to back the issuance of bond notes at the time the deficit was estimated to be USD$5Billlion …. So you answer that question look how far (not) we have come since.