By Paddington Masamha
Cash barons are the trending national talk. Whilst acknowledging the detrimental effects of parallel market trading and conceding to the level of transaction sophistication (through the ‘our people are intelligent’ remark), the President of Zimbabwe was bubbling with confidence declaring that illegal cash traders have been busted through the freezing of some corporate accounts.
Just to quote his words, the President said “…we also became smarter than them and so we took some action.” The inevitable question which quickly needs an answer is: Can freezing of corporate accounts suffocate or extinguish parallel market trading? Additionally, is the Zimbabwean parallel market driven by individual or corporate ‘intelligence’? What signals regarding our economic fundamentals can we gauge from this currency crisis?
Whether the Zimbabwean currency crisis is a byproduct of poor economic fundamentals and or people related is surely a subject of another article. However, to Masiyiwa’s advantage; the Reserve Bank of Zimbabwe (RBZ)’s market intervention basically exonerates his viewpoints regarding the purported Ecocash system abuses.
If the dear reader can recap, the previous article intentionally avoided the majority of Strive Masiyiwa’s questions. From observation, Zimbabwean challenges are primarily not foreign to us but the political system which has existed in the economy bars the elite from sharing economic insights. Instead they pose questions which society should not downplay.
The former RBZ Governor had on record threatened to expose the major cash barons during his tenure of office. In 2018, President Mnangagwa’s government published a list of corporates and individuals who externalized funds and failed to return the funds back into the economy. Recently in 2019, the ZANU PF national youth league published a list of individuals which they alleged to be corrupt.
From all these name shaming attempts by both individuals and institutions, nothing tangible has ever been achieved. The cash barons have remained untainted and their activities keep escalating. This article distances itself from any attempts to pinpoint individuals and corporates behind the Zimbabwean currency crisis but presents probable explanations which can help shape public opinion.
Why is there such a shortage of bank notes in the first place, that it becomes possible to sell bank notes?
The probable explanation why bank notes are in short supply could be cash hoarding by the cash barons within the parallel market. Additionally, the RBZ is desisting from printing more notes because it is obviously inflationary. An increase in money circulation which is not supported by concomitant production is obviously inflationary.
Zimbabwean industry is currently experiencing its worst patch of lower capacity utilization because of a variety of economic challenges and let us not forget the worst electricity blackouts (load shedding). Therefore, the idea of printing more notes without a corresponding change in productive activity is counterproductive.
Who created such an arbitrage situation?
By definition arbitraging mean the simultaneous buying and selling of securities, currency, or commodities in different markets in order to take advantage of differing prices for the same asset. The arbitrage opportunities that Strive Masiyiwa was addressing stems from the commodification and trading of cash in Zimbabwean parallel markets.
Emanating from a broader perspective, policy incongruences generally nurture price anomalies in an economy. Arbitragers then take positions to take advantage of mispricing existing in an economy. In Zimbabwe the currency crisis and the associated cash shortages have perennially proven to create massive arbitrage opportunities. Cash barons who are in most cases political cronies have been riding on the situation to make huge profits from the mere buying and selling of cash.
However, let us also not overlook that the primary incubation of the Zimbabwean parallel market trading since the adoption of the multi-currency system pays homage to the introduction of the surrogate bond notes. Though the 1:1 parity peg was assumed to be supported with the Afreximbank loan facility, the monetary scheme still collapsed.
What boggles the mind nonetheless is, though the 1:1 parity warped; Zimbabwe owes Afreximbank. The owing stems from the loan guarantee facility. In this case, the monetary authorities acted in a rogue manner through printing paper which was not backed by anything. In the end, Zimbabweans are forced to endure the double-edged pain of bond note value destruction and the burden of paying a loan.
Whose cash is the Agent selling, at that rate?, How does Econet police 50,000 agents?, What if we stopped them all from dispensing any cash, would it solve the problem?
The structural design of the Ecocash platform is such that the agent loads or receives money (from various trading activities) through the agent line. The service provider in this case Ecocash then collects transaction charges from the cash movements being done by the agent and or platform user. Apparently, Ecocash benefits from having increased transaction volumes.
Therefore, in as much as members of the generally public considered Strive’s questions to be insensitive; the correct position is that the cash that the Ecocash agent is using belongs to the agent. How this cash is generated and utilised in theory is not Ecocash’s alarm.
The Ecocash business model is a volume based business. Hence expecting Ecocash to close their 50 000 agents is not only naïve but killing entrepreneurship. The role of policing the agents’ activity is ordinarily a role of the regulator.
Holding all other arguments constant, even if Ecocash was to close these agent lines; cash barons will all the same switch to other cash payment methods. As such, the focus on the currency crisis symptoms is a clear demonstration that the Zimbabwean currency crisis has worsened to levels beyond imagination.
Currency crisis and the incubation of virtual parallel markets
The Zimbabwean President Emmerson Mnangagwa, through the Presidential Powers (Temporary Measures) amended the Money Laundering and Proceeds of Crime Act and Exchange Control Act) as contained in Statutory Instrument 246 of 2018.
It was hoped that the enactment of this regulation would ensure that any illegal currency traders who are convicted and found guilty of illegal currency trading will be sentenced to a 10 year jail term. Furthermore, the associated ill-gotten wealth will be confiscated by the state.
Besides having few convicts, a new market development that authorities disregarded is the metamorphosis of the Zimbabwean parallel markets. Putting into consideration the ubiquitous nature of social media platforms, massive foreign currency trades are now accomplished through WhatsApp, Facebook and Twitter.
Given how serious the Zimbabwean currency crisis has become, virtually every working individual or business entity is in some social media grouping or platform where regular updates of foreign currency exchanges of local bond notes, mobile money and online banking trades are concluded.
The parallel markets have basically gone virtual. By design, social media platforms are not easy to control and regulate given that the most prominent ones are international platforms. Consequently, the level of secrecy surrounding the trades is not easily traceable. Even if the transactions are traced, there is a robust degree of connivance within these platforms. As such, parallel market trading has remained unabated.
If it were possible, if one conducts a random sampling of any individual phone; it is not shocking to find numbers saved as ‘Susan moneychanger’, ‘Peter cash’, ‘James wema Bond’, ‘John wema USD’ and ‘Zuze wema Rand’. Given that one way or another a Zimbabwean needs foreign currency, interacting and transacting with money-changers is unavoidable.
Though Zimbabwe now officially announced to be operating a mono-currency regime; ultimately some rental, some medical bill, an educational bill and a foreign travel shall demand that one changes money in the streets. Why? Formal channels are only buying foreign currency and not selling to the public hence money changers are the readily available foreign currency or cash suppliers.
The open and clear message to the economic chauffeurs is simple; the easiest method to control rogue parallel market trading is to set the fundamentals right. Today what we basically see are mere symptoms of a deep seated problem which can easily be doused by fiscal and monetary authorities.
Informal and shadow markets favour unregulated platforms
As the Zimbabwean economic crisis keeps gathering momentum, there is a disturbing development that should worry national leaders. The Zimbabwean economy is heavily dominated by so many informal trades. Informality has largely sprouted given that the formal channels of employment are dry.
The greater majority of youths and graduates are now self-employed. The common informal employment opportunities include street vending, backyard hair salons, street shoe manufacturers and traders, pirate taxes and commuter omnibuses, informal colleges, cross-border traders, back door furniture manufacturing and carpentry among others. Informal businesses are in every corner of the Zimbabwean streets.
Moreover, shadow markets such as the buoyant parallel market activities, drug trafficking, money laundering, human and goods smuggling, prostitution and gambling predominantly favour the less regulated transacting platforms. As such, Ecocash is widely used given its market dominance.
The solution to the informality and shadow markets challenges is squarely in the Zimbabwean economic recovery. Transitioning from informal to formal markets is easier when the economic fundamentals are sound. It is also easier to suppress shadow markets when the economy is doing well.
Zimbabwean Interbank Market-How practical is the ‘willing buyer-willing seller’ concept?
Since the adoption of the interbank market trading of the then RTGS dollar (bond notes) with other international currencies, the market assumption is that a free-floating exchange rate system is currently in use in Zimbabwe.
The Reserve Bank of Zimbabwe Dr John Panonetsa Mangudya’s 20 February Monetary policy statement introduced ‘… 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…’
Later on the Zimbabwean dollar was introduced and the same market trading position adopted. The disturbing reality on the ground is that the licensed banks and bureaux de changes are only buying foreign currencies from members of the general public. Any willing individual buyer of any foreign currency cannot walk into a bank and or bureaux de change to access the currency.
For that reason, if there is no formal seller of foreign currency; how then are the trading rates established? Why would the monetary authorities only establish a platform to collect foreign currency from the public and be unwilling to sale it back to members of the public? This development in my opinion is where the Zimbabwean monetary system is rogue.
Since the willing buyer and willing seller is impractical, the daily exchange rate publications are thus deemed fictitious. This helps to explain why the bond note (now formally known as the Zimbabwean dollar) is only recognizable and acceptable within the national borders but cannot maintain the same valuation once it crosses our boundaries.
Poor public confidence and trust in the financial sector
The country’s lack of confidence and trust in the financial sector dates back from the former Gideon Gono’s monetary experiments. During his tenure, the then Zimbabwean dollar value was decimated to unimaginable levels. Instead people opted to store value of their hard earned earnings in commodities (e.g. fuel coupons).
The culture of banking in mattresses was so rampant during the hyperinflationary era. Those who accessed foreign currency kept their monies as such. Particularly, it is also the same period when the economy witnessed a tangible number of bank failures and the poor masses lost their incomes. The public confidence and trust levels in the banking system dwindled to the lowest ebb.
However, when the economy dollarized the banking sector regained its lost reputation. The financial honeymoon was however short-lived. The introduction of the bond note saw the return of the parallel market and reprobate banking practices.
Various economic experiments were instituted by both monetary and fiscal authorities to restore normalcy. The re-introduction of our own currency directly impacted on the banking sector public confidence and trust in the system.
The masses expected to get back their 1:1 parity position which had been guaranteed from the onset. Members of the public now appreciate that the gospel of bond notes being introduced as ‘an export incentive’ and or to solve the ‘divisibility or change problem’ was absolute currency propaganda.
The bottom line is; the Zimbabwean monetary history is loaded with rogue practices where masses always loose whenever a new monetary stance is adopted. As such, few people now have confidence and trust in the system. The pressure to hold on to foreign currencies and or commodities which at least preserve value has grown significantly.
Though it has been outlawed, some economic transactions are being processed in foreign currencies. History is less likely going to be favourable to the current central bank governor and the Minister of Finance and Economic Development. If the fundamentals are not set right; buoyant parallel markets, currency crisis, hyperinflation, poor confidence and trust in the banking system shall surely be the descriptors of their monetary and fiscal chauffeurs’ tenure.
In shelling this discourse, it is without a doubt that the Zimbabwean economic recovery is being derailed by the currency crisis. Shifting the blame to rogue practices by corporates and individuals is merely a strategy to avoid responsibility and focusing on the symptoms of the currency conundrum. Evidence on the ground suggest that the cash barons are known, but the strategic handbrake is that they are employees and front man of the political oligarch.
Whilst a monetary solution is long overdue, the regulatory issues regarding mobile money payment platforms need to be prioritized. The regulatory framework should however be guided by a strong desire to strike a balance between managing rogue mobile money practices and ensuring that financial inclusion is not barricaded.
The Zimbabwean economy has for long been subjected to stop gap measure dosages without necessarily solving the primary policy issues. The currency crisis has brought so much havoc and conclusiveness to this financial enigma is long overdue. There is obviously an imperative need for a political will to resolve the currency crisis.
Allow me to append this article by posing a question: How best should government outsmart the cash barons?
Paddington Masamha is an Independent Economic and Financial Analyst