Zimbabwe dollarisation 2.0

Zimbabwe is appears to have had an explosive start to 2019 as the deepening economic crisis enters the final stretch. To kickstart the fireworks, one of the country’s biggest companies, Delta Beverages, announced its intention to re-dollarize— a new entry to Zimbabwe’s lexicon.

Unlike others before it, Delta did not argue against the stipulated fixed rate of exchange 1:1 between the local currency and US dollars. Instead, Delta now wanted to charge all its products in the US dollar currency after all, there is parity between local currency and US dollars. 

The rationale was to allow the company to raise pay foreign suppliers and shareholders who need to be paid in hard currency, which is in short supply at the moment.

Delta also made one startling remark, it does not recognize Bondnotes or local bank balances, the so-called RTGS dollars, as currency and as such, the pricing structure does not seem to factor in the heavy premiums that one has to pay when exchanging these for the US dollars. Currently, the exchange rate on parallel markets for US dollars to Bondnotes is 1:3.2.

Now what is very instructive about this revelation by is that Delta is hanging on to the assurances that were initially made by the central bank when the Bondnotes came into circulation—that there is parity between the currencies.

The company reportedly has about $400 million in the form of RTGS balances, and at current parallel market rates, it means it has an actual balance of US$125 million. For Delta, this is unacceptable because unlike other companies, Delta has done everything by the book, it has resisted indexing prices with the movement of the parallel market exchange rate.

Prices of its products, which include beer and soft drinks, have lagged behind the growth of inflation and the rate of depreciation of currency. So to make up for lost time, Delta had resolved charging in US dollars for all its products and it appeared government had given its nod.

However, given the sheer size and influence of Delta, government made an about turn and pressured the company to reverse the decision to re-dollarise.

A decision to allow Delta to charge in US dollars would have opened the door for everyone along the chain to start demanding US dollars as payment and that has major ramifications for government in particular.

Another time bomb has to be the current at standoff between government and medical practitioners who have been on strike for over month now. Apparently, the chief demand by the striking doctors is the payment of their salaries in US dollars. Predictably government is resisting this because the rest of its labour force is waiting for doctors to win their battle with the state before they embark on their own industrial action.

Add to that, government faces ongoing challenges of sourcing foreign currency for the fuel industry, wheat importation, pharmaceutical drugs and power. 

For instance, during the first week of January 2019, it emerged that the country’s central bank had failed to pay for a consignment of wheat docked at a port in Mozambique. Suppliers of the commodity are now threatening to stop deliveries if the problem of late payments persists. Eventually this consignment will be paid for but a similar problem will start elsewhere and this cycle goes on until it reaches the breaking point.

In Delta’s case, the company only relented when government promised to meet its foreign currency requirements. There is no doubt, other companies with links to government will also resort to the same tactic used by Delta to get similar concessions.

There is one problem though, foreign currency inflows are actually shrinking and while government keeps making these promises to meet ever growing demands. This raises two pertinent questions; What are acts or events that led to these problems and how will these be resolved?

It is unfortunate that the debate about Zimbabwe’s economic crisis often does not start with the genesis of the problem, it starts somewhere in the middle. The fundamentals get lost quickly as the debate veers off into acrimonious exchanges where the focus is on individuals rather than the problem. 

For instance, Reserve Bank of Zimbabwe governor, John Mangudya, is often assailed as the mastermind of the latest economic troubles. The forced circulation of Bondnotes, in which Mangudya played a central role, played a part in accelerating the crisis but a bigger problem had occurred much earlier.

To understand the problem, we need to go back to 2009 when a new coalition government came to life while the economy was dollarized. During the short lifespan of the Zimbabwe’s coalition government, there were several key decisions that had to be taken in order to resuscitate the economy and one was the liberalization of exchange controls.

This was done to attract foreign currency into the economy as quickly as possible and this was one key condition that gave confidence to foreign investors. During a public debate in May last year, former Finance Minister Tendai Biti made this point, as he tried to fend accusations from former deputy Finance Minister Terence Mukupe, that he did not do enough to restore relations with foreign creditors.

Besides the mudslinging that characterized the discussion, one salient point that became clear from debate is the fact the liberalized exchange rate helped to build confidence and growth of foreign currency reserves to US$1.8 billion by the end of 2009, a point Biti was happy to point out.

During the subsistence of the coalition government, deficit spending was abandoned in favour of a balanced budget and as such, government departments and state owned companies that were accustomed to state bailouts toiled.

Government records show that immediately after the end of the coalition government, budget deficits returned, something that was highlighted in the Biti and Mukupe debate.

 When the economy dollarized, one thing became clear, the central bank became a central bank in name only, it could not really influence markets as it did prior to dollarization.

Of course, it did not help matters that the then central bank chief, Gedion Gono, was a source of discord within government. Upon dollarization, the central bank could not print money or avail overdraft facilities to government but more importantly, it could not lay its hands on foreign currency of private companies and individuals. The Ministry of Finance basically curtailed the central bank.

Apparently, some foreign governments, international lending institutions and donor organizations were satisfied with that set up, they supported government during that time. Therefore it was not surprising that the economy performed very well during that time with few cases of liquidity problems within the banking system.

However, the period of relative stability ended soon after 2013 and by 2015, problems began to emerge as government repeatedly failed to pay its workers on time. This would persist through to 2016 when government eventually launched a currency or something that is not a currency—Bondnotes.

During the period between 2013 and 2016, when Bondnotes began circulating, the issuance of treasury bills, the real elephant in the room, was hardly questioned. Apparently treasury bills issued ballooned to $7.6 billion by mid 2018, from about $2.1 billion two years earlier and this happened in an environment where the central bank was not supposed to issue such TBs at all because Zimbabwe by its own reckoning, does not have a currency of its own. 

In addition, the central had an overdraft facility, which again grew disproportionately, to peak at $2.5 billion.

The issuing of treasury bills in an economic environment dominated by the US dollars is akin to printing the greenback—counterfeiting by another definition. Countries with failed currencies often, reluctantly, adopt other currencies as legal tender to curtail the problem of inflation and economic decline. The reluctance stems from the trade off a country has to make—losing the power of printing money in exchange for economic stability.  

Throughout the coalition government era, pressure mounted for a return to a locally issued dollar as some in government had become exasperated with the limits that come with dollarized economy.

So it was a little surprise to learn that government, which insists that the so-called multi-currency regime remains in place, had in fact, issued treasury bills over currencies it has zero influence over. 

However, this was not entirely surprising given the government’s penchant for living outside its means.  For its part, government justifies the deficits and debts, which were accumulated as a result of subsidy program to support agriculture and other critical economic sectors. In other words, if the support had not been extended then bigger problems would have ensued.

However, as is often the case with government handouts, subsidies only breed ineptitude as evidenced by the fact that many farmers still want freebies doled out by government. This is happening a decade after acquiring farmland during the country’s land reform exercise. 

Astonishingly, Zimbabwe still imports wheat, soya beans, maize etc, and this requires foreign currency, yet the country has over the years spent billions to support farmers!

Unfortunately, the billions spent have led to the growth of money supply, which in turn causes the growth of inflation as well as debasement of currencies. So while companies like Delta, naively or not, want to believe government’s insistence on 1:1 exchange rate, the reality suggests otherwise. 

The deluge of money, which is not supported by anything only increases pressure on currency, not on US dollars but on local Bondnotes currency as well as RTGS balances, since these are only valid inside Zimbabwe.

In any case, there is now a real prospect that this deficit will grow even further as the cornered government will probably capitulate and give to some of the demands by restive workers. Without the option to pay in foreign currency, government will only be able to increase salaries, which will be achieved by unbudgeted treasury bills issuance once again. This will only work in the short term.

The solution does not come from money printing or even the currency reforms as many are advocating for. The solution might come from allowing a different system that has in built circuit breakers to stop uncontrolled spending and appetite for debt.

In another article, we discuss this option and why a small country like Zimbabwe needs to seriously consider this.