Respect Gwenzi

News about a pending currency coming to the market in a fortnight made headlines on Tuesday even as it abated confusion over the reintroduction of the currency in question. The confusion pertains to whether the currency is a new currency different from the one introduced in June or in February, whichever point one prefers. Some believe the currency has been there since three months ago, while others are of the view that it has been there since February and some say it was there since October 2018. Interestingly my view is far off from all those that are conventionally shared, and in later parts of this article I will share my view on the not so new ‘new currency’s origins. On Tuesday, the central bank governor who is also the chairperson of the Monetary Policy Committee briefed the media following a two-day sitting by the Monetary Policy Committee, a first since the committee was set up.

In his brief, the governor said the b ank will soon (in a fortnight) issue new notes and coins different from the bond notes to supplement cash supply which he had long singled out as being in short supply. A frenzied media, could not find the right words and should be forgiven for running headlines such as new currency in two weeks or Zimdollar coming in a fortnight. Indeed, the staggered approach by the bank is very confusing to the average citizen as well as the media given that barely three months ago, media carried the same line having run with the same again in February. However a sober review of actualities reveal that these different pronouncements at varying points were all interlinked but signified different stages in the reintroduction of the local currency. My views, however, stretch beyond the common eye and establish empirically that the Zimdollar was unofficially with us for at least, the last five years.

Some like regional companies, notably Old Mutual and Standard Bank and Pick and Pay SA have long accounted for Zim earnings at a discount to the US dollar, as far back as October 2018. In their earnings report they used an average exchange rate of 1:3. They argue that this is the exact point Zimbabwe officially dollarised because that is when FCAs were separated to show disparity in value and based on market forces, the demand for US$ has been relatively higher resulting in a weaker exchange rate for the emerging currency then loosely referred to as RTGS$. On February 22, 2019, government introduced an interbank market for the trading of forex. This meant that forex held in FCAs could be changed at a market rate. An introductory exchange was pegged at 1:2,5.

The liberalisation was a clear subjection of exchange price discovery to market forces, although this was only partial and companies were compelled through a statutory instrument to convert US$ valued assets within their balance to RTGS$ at the respective rate of 1,2,5. The official reporting currency for companies effectively changed to RTGS. It is therefore argued by some that the Zimdollar returned at this stage and not earlier in October 2018 and there is partial truth to either assertions.

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However, on June 23 through SI142, the Minister of Finance officially announced the reintroduction of the Zimdollar, which was to be effected through the conversion of a currency bundle previously known as the RTGS$.

The currency bundle was made up of electronic RTGS balances, bond notes and coins. At the same time the 10-year multi-currency system was scrapped. Again, technically, some refer to this point as the Zimdollar return date. Much of the assertion is driven by the fact that, this was the period transactions in other currencies were officially banned and for the first time in 10 years, the name Zimdollar was attributed to a currency. In principle, it would be justified that this would be the actual point of the Zimdollar return.

The latest dynamic is, however, interesting in that although all these successive pronouncements and manoeuvres were made, a physical note referencing the new “currency” was not brought into the picture. Well this sounds confusing because all this while we have been referring to different possible points the currency was purported to have been reintroduced. I have put the word currency in quote to demonstrate that, what the ordinary street folk refers to as currency is the physical note, ignore that which funds the withdrawal of those respective funds, an RTGS (electronic) funded Zimdollar account. So to a common man the physical copy is the ultimate currency and its pronouncement as was done by the RBZ governor on Tuesday signified a return of the Zimdollar currency at that point, and not the previous two instances. While this seems funny, it is not.

The ordinary folk has a significant influence on the confidence matrix. This class of citizens relates more to physical copies of money than to RTGS electronic balances. Their perception of a currency’s strength is determined by the physical copy and this is largely because over the lost decade (1998-2008) Zimbabwe had low utilisation levels of electronic channels compared to the ensuing decade. Cash was the money and given how Gono made it very unpopular through rabid and untamed printing, it became so unliked and distasted by ordinary Zimbabweans.

This is why news of a new paper currency is a big deal and why most journalists have referred to it as new currency introduction, to relate with their readers and common men appreciation. The underlying question of when the Zimdollar currency returned officially or otherwise runs deep and some refer to November 2016, that is around the period the bond note was introduced. An acute cash shortage was already prevailing at that point. The forex queues at the RBZ were growing and bottlenecks deepening. A tiered pricing model was now evident in the market.

The RBZ, however, continued to clear foreign currency transactions at 1:1 although the pace was very erratic. My own submission is that the local currency came a bit earlier than that and as is my typical style I will support this assertion with empirical evidence. I would pick 2014 as the defining moment for the local currency return. Seeing the outcome as it is today, one will be persuaded to believe that the return of the Zimdollar was premeditated by the Zanu PF government when it won the 2013 election. This is so because after winning the election, the government went on a borrowing spree on the local market through Treasury Bills (TBs) and by August 2018, the TBs balances were at $7,8 billion as shown below. TBs are an instrument used by RBZ to control liquidity in the market. Government, however, uses the instrument only to borrow money from the local market and this money has largely been channelled to off-budget financing, that is projects and other expenditures which were not covered by the budget,
Command Agriculture ranks on top of these expenses.

So by creating off-budget needs government found a justification for seeking off-budget financing. It sounds ridiculous but suppose government felt otherwise, there was room to forgo these projects simply because they were not budgeted for. Even as that happened, the fiscus remained bloated with significant allocations being channelled towards recurrent expenditure, mainly salaries. On top of that, corruption, incompetence and inefficiencies weighed on the public service, thereby draining the fiscus. The government thus found the TBs route convenient. In just under five years it had a accrued over $8 billion in TBs and given that these are short-term instruments, roll-overs and discounts in secondary market sped the rate of growth in money supply. In just under five years money supply grew from $4 billion to $10 billion. But was this growth backed by real US$ cash? No it wasn’t, as shown below from a high of 49%, hard cash ratio, which is the ratio between system deposits and FCA nostro added to physical US$ and bond notes and coins, has crushed to a low of 3% as of December 2018. Given further growth in money supply in 2019, it follows that the ratio of hard cash to deposits has further dissipated.

This clearly shows that from 2015 onwards, Zimbabwe had begun using a local currency as deposits were not backed by hard cash. Loosely, the difference between hard cash and system deposits above refers to a new currency that was being created, which has manifested in different ways to become the Zimdollar of 2019. This ratio is not the same as cash ratio which the governor says has to be moved from 4% to 15%. It speaks to the underlying cash-flow and its nature. The underlying cash-flow created from TBs was not US$ (production) denominated in practice and this explains why RBZ struggled for years to clear the forex queue because the market was no longer a US$ market in practice. So many things are going on right now at the central bank which would shock the market in not-so-distant a future.

The citizenry need to stay awake and vigilant and call authorities to account even as companies shape own survival strategies to avoid another possible 2008.
 Respect Gwenzi is the managing director and lead analyst at research firm, Equity Axis