By Professor Tony Hawkins
Dollarisation 10 years ago could not have been more different. Inflation came to a shuddering halt, the economy returned to positive growth for the first time in a decade and a financial sector, ravaged by hyperinflation, recovered strongly.
In stark contrast, de-dollarisation in 2019 has turned the clock back towards hyperinflation without achieving its basic objective of providing a viable alternative to the United States dollar, trusted by the community.
Indeed, in mid-year dollarisation -measured by the proportion of foreign deposits in the money supply – at 27% had increased from just 3,6% at the end of 2018.
As official exchange rates, which we were assured would stabilise around ZW$3,5 to US dollar exceeds ZW$11 (as at September, but is now pegged at ZW$15,3), dollarisation must be closing in on 40% of total deposits, meaning that the de-dollarisation decreed on June 24 just is not happening. No surprise there, since if de-dollarisation is to succeed it must be market led, not imposed by politicians.
The hard reality, which the authorities refuse to acknowledge, is that the US dollar is the currency of choice, regardless of what a government – prone to eccentric interpretations of the concept of legality – decrees is legal tender.
Making matters even worse, few have faith in official assurances that nostro balances will not be forcibly converted at some future time into “legal tender” deposits at some arbitrary exchange rate.
Those making such promises may well be sincere but, when push comes to shove, official assurances will not be honoured-as history shows. In this situation, restoring confidence in the local currency may turn out to be impossible without an international bailout, which is unlikely, without an equally improbable major shift in the political climate.
This is bad news for the economy, especially the finance sector, as national savings are decimated for the second time in 20 years. Not that this is obvious to anyone reading the published results of banks, showing triple-digit increases in profits, sometimes explained by property revaluations and gains from currency translations.
Comparisons between profits earned a year ago when inflation was negligible and the exchange rate was officially 1:1 with those earned in the first half of 2019 disguise more than they disclose.
Mid-year, financial institutions were holding deposits of ZW$14,8 billion which in nominal terms were two-thirds higher than a year ago, but after adjustment for inflation they were down by more than a third.
Similarly, capital and reserves increased almost 90%, but in real terms they are also down by a third. Bizarrely, this is what Reserve Bank of Zimbabwe governor John Mangudya infamously called “value preservation”.
In fact, value has been destroyed. Bank capital and reserves, worth over US$1,7 billion a year ago, today stand at just US$290 million – their lowest since 2010.
In US dollars, deposits are worth 60% less than they were nine years ago. Further value destruction waits in the wings. Notwithstanding such numbers, Finance minister Ncube and his apologists still predict upper middle-income status by 2030.
Economies do not grow without investment and the decimation of domestic savings twice within 20 years ensures that this target will not be met by some distance. The authorities believe that foreign savers, lenders and investors, along with the diaspora – denied the vote – will miraculously rescue the country.
Economic mismanagement over the last 20 years – with the notable exception of the short-lived period of recovery under the GNU (2009-2013) – has done immense harm to the financial sector.
Banks can no longer provide traditional services. Deposits and savings are losing value by the week, households can access their funds only on restrictive terms set by the RBZ. Increasingly, banks are reliant on commissions and fee income.
Deposits and lending are losing relevance. If they are lucky, depositors can access ZW$300 a week – US$28 in real money – and then only when bond notes are available, which is seldom the case. RBZ governor Mangudya has promised ZW$400 million in new notes, but his own figures show an increase of only $110 million since August 2018.
Depositors may use internet, mobile cash and point-of-sale payment systems, all of which involve both transaction costs and – usually – Ncube’s pernicious 2% transactions tax, hailed by one of the minister’s most voluble apologists, as “a stroke of genius”.
After years of stagnation, bank lending to the private sector increased by a quarter in the first half of 2019, but, when adjusted for inflation, private sector borrowing is down 35%, a rough indicator of the declining level of business activity.
Austerity is usually taken to mean tight monetary, as well as fiscal policies, but in the supplementary budget both public spending and the budget deficit were doubled. Money supply, driven by devaluation, is up 67% over the year as nostro balances rose from ZW$150 million last October when the foreign currency accounts (FCAs) were re-introduced to ZW$3,9 billion in June.
Currency devaluation has transformed nostro balances, US$587 million in mid-year, into the fastest growing element in the money supply. Who wants to hold the local currency, down 73% in just five months, if they can hold US dollars, up 17% in the last five years?
Surely in an austerity programme with inflation over 200%, interest rates have risen. Not a bit of it. In June, lending rates to corporates were less than 8% at a time inflation exceeded 170%. The Bankers’ Association of Zimbabwe justifies lending out its clients’ money at a massive loss on the spurious grounds that borrowers cannot afford to pay more, highlighting just how remote from the traditional model – and indeed from reality – Zimbabwe-style banking has become. When bankers start to believe that depositors are redundant, they are veering towards destroying their businesses.
With such policies, the authorities are fostering disintermediation and tax evasion while actively discouraging savings and investment. Simultaneously, in making fuel duty the main source of government revenue, the Treasury is fuelling both inflation and increased government spending in the form of inflation-chasing wage awards, necessary to combat what Minister Ncube calls “wage compression” which he himself imposed.
The authorities hope – possibly believe – that by early 2020 the currency will have stabilised, inflation will be falling, agriculture will be recovering on the back of reasonably good rains and after a decline of some 7% in 2019, real gross domestic product will start to recover.
Against this, are the headwinds of a slowing global economy, a deteriorating domestic political environment and, above all, a lack of confidence and trust in the Zimbabwe dollar. If the authorities cannot soon get currency depreciation and inflation under control, re-dollarisation will take over no matter how many statutory instruments are produced.
One option being mooted is that of “shadowing” the US dollar by seeking to keep the local currency at par with the rand. This is easier said than done in an economy where foreign reserves are sufficient to finance just two weeks of imports, and where net foreign assets are a negative ZW$13 billion, having increased eight-fold in the last year or one third in real money (US dollars).
The attraction of such a policy is that it would anchor the Zimdollar – indirectly-to a strong currency, the US dollar. However, this depends on an endemically-weak currency, the rand, and holding its value to give Zimbabwe a relatively stable currency, albeit at a much more competitive exchange rate than in the past.
One past experiment in shadowing – the pound and the Deutschemark in the late 1980s and early 1990s – ended in tears, and because Zimbabwe has no financial firepower to sustain its currency, shadowing might well fail.
In the meantime, the outlook for the financial sector is bleak. Asset managers, pension fund trustees, insurance firms, stockbrokers and bankers are reliving the hyperinflation era. The currency in which they trade – money – continues to lose value and when a community can see that whatever else it is, the local currency is certainly not a store of value, there is no incentive to hold or save it.
The light at the end of the tunnel in 2008/9 was dollarisation and the government of national unity. Because since 2013, the economic fabric has weakened, infrastructure deteriorated, confidence in the currency vanished and skills departed, this time is not just different but far worse.
Tony Hawkins is prominent economic analyst. The article first appeared in Zimbabwe Independent’s 2019 Banks & Banking Survey magazine, sponsored by First Capital Bank.