Zimbabwe’s currency reforms dilemma

The Zimbabwean government has indicated that the country will be launching a new currency before the end of 2019. The announcement has caused some confusion amongst businesses and the transacting public who operated with an understanding that the RTGS Dollar was now the local currency.

The key question that arises is on the difference between the RTGS Dollar (Inclusive of Bond Notes & Coins) and the upcoming local currency. The introduction of the impending currency is largely necessitated by the fact that the legal instrument used to introduce the RTGS Dollar is temporary with a specific timeline of 6 months from the day of proclamation by the office of the president. In principle therefore, Zimbabwe would need to have a local currency before the end of September 2019.

In March 2019, Zimbabwe gazetted two legal instruments; The Exchange Control Regulations (Amendment) of 2019 (SI 32) and the Presidential Powers (Temporary Measures) for (Amendment) of the RBZ Act and RTGS Electronic Dollars Regulations of 2019 (SI 33). The statutory instruments meant that the RTGS dollar shall be legal tender in Zimbabwe though they do not prohibit the use of multiple currencies adopted in 2009. Therefore multi-tier pricing in the local market can be considered legal. Statutory Instrument 33 of 2019 was made under the Presidential Powers (Temporary Measures) Act, which gives the President Powers to make regulations: If situations arise that need to be dealt with urgently, the President is empowered to make regulations providing for “any matter or thing for which Parliament can also make provision in an Act”.  In other words, under this Act, the President has the same law-making power as Parliament.  His/her regulations however only last for 6 months.

Back in 2009, the government was forced to dump the Zimbabwean dollar due to record hyperinflation and economic decline which had wiped off 50% of the economic value. The country adopted the multi-currency regime to stabilize prices. In November 2016, The Reserve Bank of Zimbabwe introduced the Bond Note as an export incentive scheme at a rate of 1:1 to the US Dollar. Soon after the Bond note introduction, the parallel (black) market found its feet again by exchanging RTGS bank balances with the US dollar at premiums of at least 10-15%. The parity position was dropped with the introduction of the interbank market when the central bank put the value of the US Dollar to the new RTGS Dollar at 2.5 in February 2019. The RTGS Dollar has however lost more than 132% of its value in less than 4 months with the official Interbank Exchange rate now over 5.80 to the US Dollar. Inflation rate was last recorded at 76% in April 2019 with fears that the figure is now over 100%.

The main headache for the central bank is on how to blend the proposed new currency with RTGS balances that are circulating in the economy while ring-fencing savings and dealing with runaway inflation. Excessive government borrowing to plug budget deficits on the local market has been the major driver for money supply growth since 2014. The central bank may have limited control on government expenditure but the task to raise funds through Bonds and Treasury Bills falls back on it. Government has been financing its deficit through borrowing from the bank, while going over the RBZ Act statutory limit which caps borrowing from the central bank at 20% of the previous year’s revenues. As of December 2018, total lending by the bank to the government was more than $3 billion, representing 75% of 2017 revenues.

The government also had its sights on joining the Common Monitory Area (CMA), also referred to as the Rand Monitory Union (RMU) so as to use the Rand officially but that plan falls on the preconditions front. The South African Reserve Bank (SARB) is concerned about Zimbabwe’s economic instability, recurring budget deficits, high debt levels and monitory policy system which might impact on its inflation targeting program. Zimbabwe would also need to have reserves equal to its issued local currency, backed by prescribed assets in Rand or US dollar so as conform to the fixed exchange rate of 1:1 with the Rand. Those reserves have been hard to come by as foreign funders are not willing to extend credit lines to Zimbabwe because of poor credit ratings and failure to settle foreign debts.

The country owes over $8 billion to foreign lenders, with $2.6 billion of that amount in arrears to the World Bank, the African Development Bank and the European Investment Bank. The government has been making frantic efforts to borrow and plug the arrears hole through bridge loans. The IMF has backed Zimbabwe’ Staff Monitored Program (SMP) where the government pledged to cut its civil service expenditure bill to 67% of the budget, down from 80% attained in 2018 and slash the budget deficit to 4% of GDP. Therefore any civil service salary adjustment which is not backed by increases in tax collections will throw that program into disarray.

The government is now faced with a currency reform dilemma.  Questions remain on whether any currency can save the Zimbabwean economy without addressing key macro-economic fundamentals. The fundamentals that need urgent attention include; Efforts to build confidence in the economy and in RBZ as a monitory authority, dealing with high government expenditure (Average budget deficit of $2.3 billion from 2016 to 2018), dealing with rampant corruption, low agricultural and industrial production capacity which leads to recurring trade deficits and clearing foreign debt arrears through adhering to payment plans. Other limitations for the government include command policies that crowd out private sector investment, weak institutions (rule of law, respect for property rights and poor governance culture), non-performing State Enterprises and minerals smuggling cartels that cost the country billion of revenue.

The Bond Note and RTGS Dollar served in almost the same capacity as the Zimbabwean Dollar only that they could not be traded on the international money market. The economic challenges that bedevil Zimbabwe since 2014 have largely remained the same. They are centered on the government’s insatiable appetite to spend beyond its tax collections and the culture of governance in government. The government has largely chosen to act on symptoms such as pricing mechanisms by retailers, cash shortages, labour demands and commodity shortages without addressing the real fundamentals that lead to hyperinflation. Any currency introduced by the government will not sustain as long as key economic fundamentals that support economic growth are ignored. Sound expenditure management by the treasury department from 2009 to 2013 provides the foundation upon which the current government needs to start on so as sustain any local currency in the economy. Furthermore, the prevailing lack of confidence by local economic players and foreign investors does not do any favors to the impending new currency. The new currency will meet the same fate faced by the Zimbabwean Dollar, Bearer’s Cheques, Bond Note and the RTGS Dollar. A fiat currency is sustained by a healthy economy and market confidence in government institutions including its policy framework.

Victor Bhoroma is business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.