If you are in Zimbabwe or are a concerned party vis-à-vis the state of affairs in this land, you are probably still trying to interpret the latest and arguably most important monetary policy statement delivered by the central bank since things were normal, once upon a time. To resume this policy change in a sentence: Zimbabwe’s government has introduced the Zimbabwe dollar through the back door.
If there is a back door, simple logic dictates that there is, somewhere under the rainbow, a front door. What is the difference? The difference is that a currency that has entered the market through the front door is backed by two important things in which Zimbabwe is bankrupt: (1) sufficient reserves and (2) trust. Indeed, it is arguable that a currency may be introduced to market through the front door with one out of these two, that is, insufficient reserves but sufficient trust in the authority that oversees the currency, or vice versa. This article will attempt to explain how the government is attempting to do the impossible nonetheless.
Zimbabwe's central bank, the Reserve Bank of Zimbabwe (RBZ) has neither sufficient reserves nor the slightest iota of trust from the public concerning its overseeing authorities. Consequently, the magicians at the Ministry of Finance and the Reserve Bank of Zimbabwe (RBZ) have embarked on the new dispensation's flagship economy policy, Command Economics. This ambitious policy has three overarching objectives:
- Purchase trust.
- Resolve the currency issue, with the (correct) assumption that this currency would catalyse economic activity.
- Fund the fiscus (which means keep the government in power and keep social unrest at bay in ZANU PF's language).
Objective number one started when the new dispensation embarked on the Open for Business World Tour. The idea was simple, despite lack of hard currency, the government decided to purchase (international) trust and legitimacy with soft currency. What do I mean by soft currency? They tried to purchase the trust of the international community with the Open For Business mantra, (awkwardly) smiling and spending unnecessary millions on travel where obscure "megadeals" where signed. The hope was that this poorly staged act would increase foreign currency inflows into state coffers.
The result? Just another shot fired by the shooting dispensation, and this shot was aimed directly at its own foot. Why? Simply because the trust they were trying to purchase through the scarf-laden open for business world tour should first have been earned at home.
Earning local trust would have been cheaper AND easier because they literally needed to do nothing. Just let people be. Do not interfere in their affairs, assure the population that their fundamental freedoms would be respected, and it can be assured that the results of the election would have been forgotten, quickly. Nobody cares about who holds office, people care about their bank balances, their stomachs and the stomachs of those they love. It is evident that this truth flew over Jongwe House.
August 1 , 2018. The chance the government disposed of to earn domestic trust evaporated into thin air as the army shot at its own. Unfortunately, history repeated itself. As every compatriot fell, further did social trust. To add insult to injury, those behind this massacre were recently awarded with ambassadorships (in the world of ZANU PF, this is punishment because Zimbabwe’s foreign missions are living nightmares, and they know this).
So, conscious of the trust issues at hand, the Command Economists embarked on objective number two which addresses the elephant in the room - currency. The hypothesis: If we sort out the currency issue, we will gain local and international trust and legitimacy. Another ambitious bet, but not impossible.
We witnessed attempts being made to increase gold production, banking reforms and so forth — all paving the way for the new currency. Solutions were discussed, amongst these was joining the Rand monetary system, which is an economic system that has a lot more trust than that on the northern bank of the Limpopo. It is amusing to watch this debate with the (arrogant) assumption that South Africa’s government, which is at least functional (albeit at a bare minimum) would allow ZIMBABWE to join their system as is. Its like plotting to take a girl home you have been eyeing, and upon approaching, she says she is not at all interested, because she just doesn’t want your baggage in her life.
If the Zimbabwe dollar was introduced through the front door on a floating exchange rate regime (willing buyer, willing seller) this would hail the end of 3 things:
- the multi-currency regime
- the bond note
- your savings
..and the Zimbabwe dollar would be traded on an international market, but would be devalued by the market, who values every currency without fear or favour. Of course, the black market would not exist because it would not need to exist. Black markets are very efficient, they reflect the reality. This is why the government is after the black market — they would shoot it if they could, as they do with anything that tells truths it doesn’t want to hear.
At this point, one could technically still introduce the local currency however, the front door (lack of trust and reserves) is now closed. So then, the only option left is to introduce the Zimbabwe dollar through the back door, so as to somehow protect people’s balances and avoid a new wave of protests. How? Through methods well known to the military men of ZANU PF: interference and commanding.
Let's walk through the ZANU logic slowly. The black market has confidence, and more trust than the government, which is why people choose it over the government. The government wants people to trust it, but nobody does. =Problem. What would you do of you were in this particular government?
Correct, you will launch operation Restore Market Legacy. Principal objective - kill the black market. How?
- Try to arrest the illegal traders. This leads nowhere because many of those traders are fronts for bigwigs at RBZ / ZANU PF, who are running a currency cartel and making supernormal profits with the bond.
- Try to introduce the Zimbabwe dollar by eliminating the black market, avoiding any devaluation of bank balances while simultaneously gaining the trust of Zimbabweans and prospective investors AND keeping something for the currency cartel. However, this option (as do most in this life), requires trade-offs. One cannot kill the black market (the voice of the people), genuinely ear trust and run a corrupt cartel at the same time. Only 2 out of these three options is possible.
Of course, they want it all. And this is the situation, as is. They are trying to achieve 3/3 on the aforementioned point.
How? By trying to suck up all the bonds and dollars on the black market, and letting the financial institutions trade it on an interbank market (that has a “floating “ exchange rate while hoping that Zimbabweans perceive this as an improvement by the government. Zimbos need to be reminded that in normal countries, you walk into a bank and without much bla bla bla, you can access foreign currency in a matter of minutes. You do not need to "know someone" or have connections on the inside. You simply buy foreign currency at the rate of the day, that is quoted publicly. However, this floating rate will not float freely, it will be commanded, like everything else in Zimbabwe. They are trying to play you. In other words, as Tendai Biti puts it, the government is now trying to rig the economy.
Economic rigging? Let's break this down.
Governor Mangudya's monetary policy statement set the rules for this new market with regards to who can and cannot trade RTGS Dollars, as well as the quantities. Furthermore, the amount of US dollars on the market will be under government control. Remember, that Nyaminyami’s tentacles are already everywhere. This excessive interference in the economy translates to FEAR. The government is frantic, scared.
Alas, this market which is already rolling, is rigged because it is not at all free, as claimed by Dr Mangudya. If it were free, you could buy Zimbabwe dollars (or RTGS Dollars if you want to run with their horse) at Gatwick Airport, at the various bureaux de change at Park Station or at a random bank in Belize. Can you do that today? No. So there is no “free” floating exchange rate. Will you be able to change more than $10k / day? No.
Interbank markets are normal and exist worldwide. This is how banks borrow and lend from each other. What is abnormal in Zimbabwe is that there is a revolving door between our financial sector and those at the levers of power with regards to national finances, so in other words, there is a porous border between the domestic financial sector and the regulating authorities and government.
The rigging mechanism
Lest we forget that prior to his tenure at the central bank, Dr. Mangudya was a banker, and the head of Commercial Bank of Zimbabwe (whose biggest has always been the government.) Mr Guvamatanga, the newly appointed Permanent Secretary was at the top of Barclays, and Prof Ncube, at Barbican (although his competence in applied banking is up for discussion). The point I am making is that, this is a market controlled by friends, for friends. We see the heads of financial institutions playing golf together at Chapman or Royal. Open secret. You will find them at the same clubs and bars. They barbecue kwaMereki at the same time, there is an interbank football league. They are in the same WhatsApp group.
Now, do you believe in all honesty that this new interbank market is legitimate?
The rate will be tweaked, buy and sell orders will be discussed before hand. There is no way in hell these transactions will be independent. This is a rigged market. The rate will change in terms of the needs of the government/boys/cartel. Not the economy or the populace at large. If it was a true free floating market as claimed by Dr. Mangudya, you would let everyone in and out of Zimbabwe trade it’s currency or whatever you would like to call it. This is the opposite.
A lot of people have failed to understand this policy because to the naked eye it does not make dollars and sense, pun intended. But once you know the condition s under which they operate, this shenanigan is crystal clear.
You may ask why they did not just float the currency or print a new one altogether? If they did, your balance would change overnight and now that Zimbabweans have a taste of the power of demonstration, this would lead to nothing less than pandemonium and more extrajudicial killings that will further soil the image of this country. Multiply the pain of 2008 by 10. Furthermore, it is clear this government will contract the printing disease, which is one of the reasons Zimbabwe is were she is today.
So that is why, the currency is being "floated" while your RTGS balance is being protected from the criminals surrounding it. This is why Zimbabwe now has two of its own currencies, but actually has no currency at all, and so uses other country’s currencies with no real long term outlook, and the hope that people will make ends meet until maybe there is enough trust to start talking about a real currency. Makes sense? It shouldn’t, but that’s the situation.
How on earth can you increase economic production under the prevailing conditions? How do you loan? What do you sell in locally, what do you sell in abroad? And how do you keep society free, happy and full? How do you earn the trust of this society, and the international community? The person with the answers to these questions deserves to be finance minister for life, maybe even president.
It is no coincidence that this policy was introduced with a lot of jargon; the authorities are trying to hoodwink Zimbabweans because they know that Zimbabweans are smart, and always find a way to beat the system. What is for sure is that you cannot buy trust, you earn it; and you sure as hell cannot rig an economy, because markets are bulletproof and they reflect nothing but the truth. In short, pakaipa.