Where did that come from?

Eddie Cross

guest column Eddie Cross

Statutory Instrument 142 — Monday June 24, 2019 will go down as one of those days you remember.

I have just read the Zimbabwe Independent for this week, it was all about the “return of the Zimbabwe dollar”. Since Monday, this has been the only subject under discussion. It is a pity because SI 142 was about a whole raft of measures and not just the abandonment of the multi-currency system we have used since 2009.

The real target of these measures was the exchange rate.

This was not an issue when we were living in a fairy tale land where the RTGS dollar and the bond note were accepted as being 1:1 to United States dollar.

But when the Minister of Finance in October 2018 announced the obvious to all and sundry, that there was no relationship between local currencies and the US dollar, we all went into panic mode. We are strange creatures.

The Reserve Bank governor was saying: “No, the bond is not a currency and it is on a par with the US dollar.” We accepted that fiction because we could not imagine what would happen if this were not so. We all had piles of the stuff in our bank accounts and felt rich!

A currency is simply a means of exchange, used for the accumulation of wealth and as a store of value — nothing else. The stuff we are using as an electronic means of exchange, the so called RTGS dollar, was just the electronic version of the real thing.

However, its value is what economic players think it should be and if it is not backed by anything — it is just an entry in the books. If you cannot draw it out of your account in US$ whenever you want — then it is not the US$. If you cannot go to your bank and tender 1 000 bond notes and ask for US$1 000 in return — then the one is not equal to the other.

But the situation was much worse than that — we had RTGS$23 billion dollars in our bank accounts in various forms.

We were borrowing money from the local money market to fill a huge hole in our budget — the “fiscal deficit” was out of control.

If allowed to continue, a collapse was inevitable. Through this artificial exchange rate, we were taking half the earnings or more of the private sector and paying them in RTGS at the rate of 1:1.

This meant we were taking billions of dollars in real money from the exporters and using this stream of real money to subsidise everything else — fuel, bread, cooking oil, cars for ministers and MP’s, you name it.

We were strangling our most productive and competitive industries and if this had continued, they could have died and we would be left with nothing,

It could not continue and the new government sworn in after the July 2018 elections was well aware of this. The new Minister of Finance has approached these problems systematically — in my view too slowly, although what they did on Monday was certainly not slow — it was a big bang.

So, what has he done to correct matters? He has confirmed that what we had in our accounts in July 2018 was not US dollars. He has accepted that the RTGS and the bond note are distinct currencies, operating in tandem with the other currencies in use. He has widened the tax base and eliminated the fiscal deficit and has allowed companies and individuals to hold any
hard currency they have in a bank account and guaranteed that these balances will not be violated as they were in the past. He has established an interbank market for foreign currency
and our local currencies and has decreed that this will operate on a willing seller/willing buyer basis. He has determined that any foreign currency retained by the Reserve Bank for use would be paid for in local currency at the interbank rate.

Under this programme, the next step would be the re-introduction of a new local currency to facilitate market transactions.

This new currency would be carefully managed and controlled by a ‘Monetary Policy Committee’ of persons of repute and experience, and its value determined by market forces on the interbank exchange.

But a new crisis, of our own making, has intervened. When the interbank market was at first established, the RBZ Governor, fearing runaway inflation, felt that the rate of exchange should be at least managed and he tried to do the King Canute thing, and instructed banks not to trade at more than 2,50RTGS:1US$.

They could not defend this position because they had virtually no reserves and when the open market rate moved, they were forced to follow — but very little money was attracted to the market and the gap between the interbank rates and the open market widened.

This created opportunities for arbitrage – a market system where players make a margin on sales of a commodity.

Speculators started to trade the RTGS$ against the US$ and as the rate rose, they were able to make money both on the margin and on the fact that the rates were climbing.

With the great majority of money being traded on the open market and the interbank market failing to attract funds, it was the open market rate that dictated import prices.

The consequence was that prices began to rise very rapidly. Everybody was feeding on the system — exporters were receiving not just the bank rate for the funds relinquished to the RBZ, but they were selling surplus foreign exchange on the open market and making huge premiums. The banks were also playing the game and there were constant allegations that the RBZ was part of the problem. The diaspora and beneficiaries thought it was Christmas.
When the distinction was first drawn between the US$ and the RTGS$, the rate on the open market was 1,4 to 1. In weeks, it went to 7 to 1. Then it fell back to 2,8 to 1.

Once the speculators got into the game, it started to move and by the June14, 2019, the open market rate was 14 or even 16 to 1. Had it been allowed to continue, our inflation rate would have accelerated to levels where it would have destroyed the value of the local currency and made life simply impossible for the average person. It had to stop.

So, SI 142 on Monday this week. To reinforce these measures, the SI takes half of the foreign exchange the RBZ is receiving from all quarters and puts these funds on the intermarket bank — increasing supply.

Overnight, interest rates were raised to 50%, economists wanted 80% to 100%. The purpose being to stop speculators borrowing money and buying foreign currency in the open market.

Have these measures worked? Very much so, as the open market rate of exchange has halved to 6 to 8 to 1 for the US$. This has a major impact on everyone who lives here — prices in the market will fall as cheaper imports arrive and the real value of every RTGS$ earned will be doubled. Inflation should be halted in its tracks in the next few months. That is the real news.

The other thing that has received almost no publicity is the decision to ringfence what is called ‘legacy debts’, which the RBZ estimates could reach US$1,2 billion.

These are liabilities which had been incurred by companies in hard currency that they expected to be expunged by the central bank at 1:1. Had these organisations had to go to the market — even the interbank market – they would be bankrupted.

So, the RBZ has agreed to take over these liabilities in RTGS$ at 1 to 1 and to then ring fence these assets and liabilities to be expunged when the resources are available. Eligible companies will be asked to transfer the equivalent of their external liabilities in local RTGS$ at 1 to 1 when seeking relief through this mechanism. Not a good thing, but at least it deals with the immediate problems.


  1. The SI has a lot shortcomings which Mr Cross – as a default finance ministry spokesperson or an ardent admirer of Prof. Mhtuli chose to ignore. Its legality can be challenged as use of foreign currency has not been completely banned government is still expecting/accepting US$ from gold or tobacco or import duty which means the law is going to be selectively applied there belies a problem. It is being forced onto citizenry in an ambush-manner against one basic tenant of fair governance practice – consult give warning like there are doing with BREXIT. Raising interest rates by 50% will surely curb speculative borrowing however at the same time will also stop any real businesses from borrowing for production. Foreign currency (which is still very scarce) will still be needed for more imports to flood the market so prices can begin to comedown. Those importers who are being forced to sell in local currency and queue for forex at a RBZ/interbank market which is government controlled something that has proved disastrous in the past, time will tell.

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