Devaluing by Stealth
Since the end of 2015, the country has seen its cash crisis escalate to the point today when Banks cannot pay out clients more than a small proportion of what is in their accounts. In a “normal” economy this would automatically result in the Bank declaring insolvency and closing its doors. Here, the Banks just carry on as if it’s business as normal. Extraordinary, but Zimbabwe is always doing that and it makes understanding what exactly is going on very complex and difficult to grasp.
It started towards the end of 2015 when out of the blue, the reserve bank imposed a limit on bank withdrawals. The limit was seemingly generous at US$5000 per day – a fortune for the great majority of Zimbabweans. But to those who are rich, connected and powerful, it was a clear signal and a scramble started to withdraw hard currency balances from local banks which were viewed as being vulnerable and unsafe.
In the next 12 months the situation deteriorated rapidly until by the end of 2016 banks were facing queues every day as people tried to withdraw their funds in small sums limited by the available hard currency. A new feature of the crisis was a local currency, printed at the Reserve Bank and issued at par with the main currency used as a means of exchange on the streets – the US dollar. Today, three months into 2017, the hard currencies listed as a legal means of exchange – mainly the Rand and the US dollar, are in critical short supply and banks are unable to pay out more than a tiny proportion of the demand every day. Increasingly it is the local currency, so called “Bond Notes” in $2 and $5 denominations that are found at the Banks.
You can still exchange these Bond Notes for goods and services in local markets, but they are increasingly finding resistance and attracting significant discounts – anything up to 50 per cent depending on the market and the individuals involved. Even in the formal sector, discounts of 15 per cent or more are readily available. If you have free money abroad you can negotiate deals where you transfer your funds to a local company or resident with an overseas account and in return you are paid “RTGS dollars”, at a massive premium, into your local “US dollar or Rand” accounts.
During the period of hyper inflation from 2000 to 2008 when inflation eventually reached many millions of per cent per annum and a billion dollars in local currency (the Zimbabwe dollar) would not buy a loaf of bread worth 70 cents, the only way you could keep track of the real value of the currency was to either value a boiled egg on the streets or monitor a thing called the “Old Mutual Rate”. This involved paper issued by the largest financial group in Zimbabwe, the Old Mutual Group and open to trading on the bourses of South Africa and London. The so called “rate” was a differential between the value of the OM Paper on local markets and the rate abroad. This enabled local financial agencies to calculate the real value of the Zimbabwe dollar in hard currency terms.
In 2017, an interesting phenomenon has emerged in that this “Rate” has begun to move again, after a period from 2009 to 2016, when the rate was basically nonexistent. The difference between 2008 and 2017 is that the currency being discounted, are in fact US dollars held in local bank accounts that in theory, are held at parity with real US currency. How does this happen?
The reasons for all these developments lie in the fact that since 2013, the State has run a massive budget deficit and is funding this by printing money – not in the way they did up to 2009, but this time by issuing Paper currencies in various forms, all “guaranteed” by the Ministry of Finance or the Reserve Bank. This paper is often in the form of Treasury Bills or Debentures.
In the beginning, this had little or no effect on either the availability of cash on the streets or from the Banks but as the deficit widened and the total quantum of financial Paper issued to the market in return for real cash “borrowed” from local institutions and markets increased rapidly, so the Bank Nostro (hard currency) accounts became depleted and it became harder and harder to import hard currency cash notes from the USA and South Africa. Today bank Nostro accounts are exhausted and the only hard currency that is being traded at bank level are ether hard currency cash deposits (very small) or hard currencies earned by Zimbabwe’s exporters (about US$3 billion a year).
In an effort to try and manage this situation the Reserve Bank has again slipped back into its former role as the main source of hard currency for payments for imports. It did so by stealth, simply one day announcing that 70 per cent of all hard currency earnings from exports; would now be credited to Reserve Bank Nostro accounts and replaced by “RTGS dollars” credited to the accounts of exporter’s local bank accounts.
To understand what is currently happening I have to explain the term “RTGS dollars”. This was adopted by an academic at Wits University in South Africa and in my view accurately reflects this unusual financial instrument. It came about partly as a result of local authorities encouraging the use of “Plastic Money” to settle bills. We could not get cash from the Banks and so we were advised – get a credit card or a debit card from your Bank and use that for payments in the market. Every American or European would understand this as this is already the main means of exchange in their countries. However here cash has always been the main means of exchange, today I would guess that 70 to 80 per cent of all commercial transactions are settled using bank cards.
The term RTGS stands for Real Time Gross Transfer System and it is used by banks across the globe to move money from one account to another. In 2015 an extraordinary US$45 billion dollars was moved by banks in Zimbabwe through the RTGS system. It is this system plus the use of credit or debit cards that now dominates the banking and financial system in Zimbabwe.
By taking US$2 billion a year from private bank accounts controlled by exporters and replacing those balances with phantom dollars transferred via the RTGS system by the Reserve Bank, the Bank is creating “RTGS” dollars that actually do not exist – they are printing money. The same applies when the banks accept electronic (RTGS) transfers to pay employees of both private and State enterprises. The problem arises when the people who control those accounts receiving these transfers try to withdraw them from the banks in real hard currency form. Because of the scale of government borrowings needed to fund the deficit in the budget and meet long standing State liabilities, this has become impossible because the banks do not have the real hard currency balances to facilitate the purchase and distribution of hard currency cash to clients – even if the deposits are expressed in US dollars.
By printing cash notes (the Bond Notes) the State achieves several goals – they ease the critical shortage of cash for local transactions; they create value in the Reserve Bank (a 10 cent piece of paper becomes a $5 note – a profit of 98 per cent; and they turn fungible cash assets which can be used anywhere for transaction purposes into a local currency which is not transferable outside the country.
But what is hidden from view and which might be the real motivation of the monetary authorities, is that this complex monetary machine, is devaluing the real exchange value of the US dollars in our accounts and as expressed in the new currency in the form of Bond Notes. It is my personal view that already the effective devaluation as measured by the “Old Mutual Rate” is 35 per cent. By June I think that this will be 50 per cent and this has the effect of reducing the real cost of salaries across the whole economy. People on fixed incomes (employees) cannot protect themselves from this and this is perhaps the deliberate intention of the Government and the Reserve Bank – very clever.
But it also has the effect of reducing the value of all bank balances and the RTGS dollars transferred to meet local obligations. Coupled with the near total collapse of confidence and the impact of poor policy and governance, this is again leading us down the road we travelled in 2007 and 2008 which resulted in a near total collapse of the State and then dramatic political changes. It will be no different this time.
Mutare March 11th 2017