It makes sense once you’ve accepted that it doesn’t: In an about-turn the RBZ legalizes the payment of goods and services using US dollars

Reuters/ Philimon Bulawayo

On 1 February 2009, Zimbabwe’s government buckled and gave in to the economic realities that had characterized the economy for much of 2007-08. On this day, the Zimbabwe dollar as we had come to know it, was no more. The economy adopted a multi-currency system which used a basket of about nine currencies, with the US dollar being the predominant currency.

Then 10 years later, on 24 June 2019 to be exact, the government of Zimbabwe finally officialised a plan that had been in motion since April 2016, when through the RBZ, it initially announced the use of Bond Notes, alongside the multi-currency system. Through Statutory Instrument 142/2019, the government of Zimbabwe announced that the United States dollar and all other foreign currencies, were no longer legal tender in Zimbabwe. Effectively, the Zimbabwe dollar had bounced back from obscurity.

And until recently, even in spite of resistance from the market, with the Zimbabwe dollar continuously losing value against the United States dollar, and with most trading in Zimbabwe’s hugely informal market, authorities insisted that their de-dollarisation exercise was a success. They maintained that there was no going back to using the United States dollar as tender in Zimbabwe ever again.

Then on 26 March 2020, barely less than a year after banning the United States dollar, and more crucially, as the world battles with the Covid-19 health crisis, that has disrupted the global economic system, with Zimbabwe not being spared, the RBZ has all but announced the official return of the United States dollar.

Regional response to economic effects of Covid-19

This comes at a time when authorities in other countries are going out of their way to shield their economies from the negative effects of the deadly Corona virus. The South African Reserve Bank for instance, reduced its benchmark rate to 5.25% earlier in the month, in an effort to allow people to borrow money and spend. Additionally, the South African government created a Fund to help vulnerable members of its society, and injected an initial tranche of 150 million rand into it, among other measures. 

In Kenya, a 100% tax relief was offered for persons earning up to Ksh 24,000, while a reduction of the Income Tax rate from 30% to 25% was also effected, together with a Ksh10 billion package to assist the elderly, orphans and other vulnerable groups. Nigeria also took similar actions, and reduced interest rates from 9% to 5%, and also created a 50 billion Naira credit facility for SMEs and affected households.

So naturally, there was growing pressure on Zimbabwe’s authorities to act and try to cushion whatever remaining relics of its economy. And act they did, with the RBZ releasing its “Statement on Interventions In Response to the Financial Vulnerabilities Caused by Covid-19,” on Thursday 26 March.

Covid-19 a Critical Juncture

One interesting point to note about the timing of the RBZ’s statement is that earlier on Thursday 26 March, there were reports that Kosovo’s government was overthrown because of the Corona virus crisis, after its Prime Minister lost a no-confidence vote, partly because of disputes over how to respond to the pandemic. Also on this day, data released by Zimbabwe`s Fidelity Printers and Refiners shows that deliveries of gold, which is one of the country’s major foreign currency earners declined by 44% month-on-month, from 2.54 tonnes in January, to 1.4 tonnes in February. This means that critical foreign currency inflows into the country are being hamstrung, at a time when the economy can ill afford it.

The reason for bringing up these two events is to give the context within which the authorities in Zimbabwe are operating under. With a fluid political environment in the country, the Covid-19 crisis has the potential to destabilize government if not properly and carefully handled, as was the case in Kosovo.

 Secondly, the economy is currently in free-fall, and the Covid-19 crisis again has the potential to worsen an already dire situation, where the movement of goods and people is greatly limited, thereby depriving Zimbabwe of the much needed foreign currency it needs for crucial imports like maize, fuel and electricity. So it is important that any response that the authorities give, takes all this into consideration.

In their critically acclaimed book, “Why Nations Fail,” the authors talk about “critical junctures” where just one catastrophe can shift the entire political and economic balance in societies and lead to the emergence of new institutions by looking at the bubonic plague that hit Europe in the 1600s. I believe the Covid-19 crisis is one such event, which presents a critical juncture not just for Zimbabwe, but for the entire world.

And now looking at the specific points of interest in the RBZ’s statement, it is interesting to note that the RBZ concedes that Zimbabwe’s “limited access to foreign financing is adversely affecting the country’s Balance of Payment position,” hence the need to act.

Use of free funds to pay for ZWL priced goods and services 

The RBZ is making available an option to pay using free funds, goods and services chargeable in local currency. The RBZ insists that this dispensation to use free funds will promote social distancing and make digital transaction easier during this period. What this effectively means is that until the RBZ says otherwise, individuals are now free to use their free funds in the form of United States dollars to pay for goods and services priced in Zimbabwe dollars. 

Essentially, the United States dollar is now legal tender again. Free funds by the RBZ’s definition include foreign currency remittances received by individuals, funds received by NGOs, foreign embassies and other international organizations. By so doing the RBZ hopes that by allowing people to trade in United States dollars, much of the activity happening on the parallel market will shift to the official market.

Also couched in this policy intervention, is the recognition that a considerable amount of foreign currency circulates outside the formal banking system, implying that a significant amount of trading is happening in US dollars informally anyway.

This can be read as an admission that the plan by the authorities to de-dollarise the economy has failed, as evidenced by the return of the United States dollar. The obvious question that would arise, is why has government been bent on forcing everyone to accept the Zimbabwe dollar, only to make an about turn just nine months later?

There is a school of thought however, which argues that the authorities never actually wanted a complete abandonment of the United States dollar as evidenced by the concessions they gave some businesses to trade in United States dollars. These include, some hotels, restaurants, tourist facilities and DFI service stations licensed to sell fuel in foreign currency. In fact, government is even going further to collect taxes from individuals in United States dollars, for instance car import duties, and Capital Gains Tax on disposal of fixed assets, which are deemed by ZIMRA to have been in United States dollars unless documentary evidence proves otherwise.

All of this is happening at a time when government is paying its workers in Zimbabwe dollars. So the situation that arises is one where government has United States dollar revenues, while maintaining Zimbabwe dollar liabilities. Such a dual currency system suits government perfectly.

One pain point to consider, is at what point will the RBZ mark an end to this dispensation allowing USD trades, and will the public readily accept the Zimbabwe dollar again?

Suspension of Managed Floating Rate Exchange 

Another major announcement was the suspension of the Managed Floating Exchange Rate system, where a central bank may occasionally intervene in the market to direct the country’s exchange rate in a certain direction. This system was put in place on 11 March 2020, and before the ink has even dried on the paper this policy was written on, the RBZ has made another about turn. It has now announced that with immediate effect, Zimbabwe is adopting a Fixed Exchange Rate System, with the USD-ZWL rate fixed at a level of 25.

This particular directive must be looked at together with the earlier policy of allowing the use of free funds to pay for Zimbabwe dollar priced goods. That means if a person walks into Bon Marché for instance, and wants to buy something using United States dollars, their United States dollars will be converted to Zimbabwe dollars at a rate of US$1-ZWL25. Interestingly, the parallel market rate is currently around the 42-45 range, so a rational person will probably go and change his or her United States dollars on the street, at a higher rate then use the Zimbabwe dollars to pay for goods and services locally.  This way, individuals get more bang for their buck.

The net effect is that the interbank market will likely be dried of liquidity, as most foreign currency will continue to find its way to the parallel market. The only economic players that stand to benefit from a fixed exchange rate system is government itself, as well as other entities and individuals that for one reason or another  are able to access United States dollars at the fixed rate of 25, as opposed to the black market rate which is nearly double the interbank rate.

Another pain point, is the constant changing of economic policy in the context of attracting potential foreign investors. One just isn’t sure what the official policy will be like say a month or two down the line, and this can be frustrating to foreign investors.

Additional ZWL1 billion productive sector facility 

The RBZ also announced that it will add ZWL1 billion into the economy to support productive sector activities, specifically the winter wheat program. In other words, the RBZ will print more money. Printing of money by central banks is not all that bad in and of itself. For example, the United States Federal Reserve, announced plans to inject US$2 trillion into the American economy, in response to the Covid-19 crisis. 

However, in the Zimbabwean context, while the intention may be pure, this additional liquidity will likely be inflationary as there will be too much  money chasing too few goods. Secondly, it may cause a further spike of the black market rate, as the recipients of this credit facility will likely look to buy United States dollars for their business needs.

Statutory Reserve Ratio Reduction

A reduction of the Statutory Reserve Ratio from 5% to 4.5% is meant to free-up the money banks have available for lending. The reserve ratio is the amount of money that banks surrender to the RBZ, which in turn the central bank holds on behalf of banks and lends to any other bank that might be short of cash through a facility known as overnight accommodation. So by reducing the ratio requirement, banks are on paper, supposed to have more funding available to lend to their clients, so that economic activity is not stalled. 

Policy rate cut

Closely related to the above, is the reduction in the RBZ’s policy rate from 35% to 25%. The policy rate is generally used by banks as a guide to the interest rates they charge their clients when they lend. So the RBZ wants banks to lend as much as possible, and for borrowers to borrow money as cheaply as possible so that there is sustained economic activity in the economy.  The problem however is that with inflation at around 540% per annum, banks are effectively earning negative real interest rates on loans. It stands to reason that at present, banks do not have much appetite to lend, hence the rate cuts by the RBZ may not yield the intended results.

It is important to note however that the RBZ says these policies are temporary and will be revisited once the Covid-19 situation has stabilized. Additionally, these measures are only monetary side interventions, and government may well follow these interventions by the RBZ with its own fiscal side policies, such as a reduction of some taxes, to also compliment the RBZ.