Terence Zimwara
On Monday 30th September 2019 Zimbabweans woke up
to the news that the popular mobile money service Ecocash had effectively been shut
down. This followed a hastily crafted statutory instrument which gave effect to
a directive by the central bank to stop cash deposits or withdrawals from
mobile wallets.
Mobile money users could now neither cash in nor cash out while
the thousands of independent Ecocash agents were effectively put out of
business at the stroke of pen.
It took just two days for the country’s central bank, the
Reserve Bank of Zimbabwe to perform an about turn. Normal Ecocash services were
restored, albeit with more restrictions than before.
It turns out that the seemingly clueless central bank top
hierarchy is unable to provide a lasting solution to the long running cash
shortages. Instead, the central bank is now focusing on blaming imaginary enemies
for every problem that besets the country’s financial system while ignoring its
own misdeeds.
Rogue Ecocash agents?
In the Ecocash case, the RBZ management believes money
launderers and those engaged in the illegal foreign exchange trading are using this
mobile money platform to facilitate their operations. RBZ also believes these
bad actors to be behind the spectacular collapse of the local currency in the
month of September.
Consequently, the central bank thought by shutting down 50
000 Ecocash agents it would take the fight to illegal currency traders. Taking
such a bold move would help financial authorities to rein in on runaway inflation
as well as to stabilize the local currency while suffocating informal currency
markets.
However, a court challenge to the directive as well as the
disruption to business activity caused by the order exposed the central bank.
Matters were not helped by rumour suggesting that Econet Wireless is
contemplating shutting down the service completely as retaliation. Perhaps this
might be what forced the central bank to rescind its decision.
To give perspective, in Zimbabwe, mobile money is primarily
used for micro payments and Ecocash—a division of the country’s largest MNO
Econet Wireless –enjoys a near total control of this niche market. A total
shutdown of this service will result in chaos in currency markets and the
greater economy.
Central point of
failure
Currency traders—which government is blaming for sabotaging
the currency—primarily use the Ecocash platform as well as conventional banking
platforms to facilitate currency exchanges. From the central bank’s
perspective, attacking this one central point— the Ecocash platform—would
garner the best result in this fight against currency traders. However, the one
sided central bank decision ignores the concerns or potential effects on other
stakeholders.
Since launch in 2011, the Ecocash service has been hailed
locally and abroad for being an ingenious solution to the country’s long
running cash shortages. In fact, Ecocash has been particularly effective in
availing financial services to the unbanked and the under banked than regular
financial institutions.
Yet somehow the storyline changed a few months ago as the
biting cash shortages led to some Ecocash agents allegedly demanding premiums
as high as 60% for clients that wished to cash out or withdraw money. According
to the RBZ, the withdrawn cash is then used to buy foreign currency on the
parallel market.
Extortionate premiums
The high premium charged by
Ecocash agents meant clients looking for cash had to be prepared to part with
nearly half of their funds as the transaction fee! For example, a client that wants to withdraw
ZWL $1000 from their mobile wallet has to cash out/withdraw ZWL $1500. The
difference between the actual amount being sought (ZWL $1000) and the amount
deducted (ZWL $1500) is the premium charged by the agent.
The extortionate premiums charged —which are also a
reflection of the worsening cash shortages—naturally led to an outcry as users
felt robbed of their hard earned money. Somehow it is this platform (Ecocash) which
has become villain and authorities who too eager to ingratiate themselves with
the public, seized on this misdirected public anger by censoring Ecocash. But
how did this situation get out of hand and who really must take the fall?
To illustrate, we briefly explain the southern African
country’s unique currency problems and how these have contributed to the crisis
that now subsists.
Since late 2016, Zimbabweans have become accustomed to three
kinds of money, the US dollar, electronic money which encompasses mobile money
and bond notes. The latter two are the local currency.
Central bank versus
markets
For a long time the central bank stubbornly insisted that
all these forms of money were equal. This policy only changed in February 2019,
when the ZWL currency was allowed to depreciate against major global
currencies. Since then the currency has been tumbling and at the time of
writing the ZWL trades at about 15 to one US dollar on the official interbank
market although the rate is weaker on the so-called black market.
The interbank rate only reflects trades that occur under the
watchful one of the RBZ. Trades on the black market on the other hand are largely
conducted via the Ecocash or banking platforms where the RBZ has limited
influence.
In contrast to the RBZ position, markets had long understood
that there was no parity between the different forms of money and this had been
reflected in the multi-tier pricing system that remains in place to this day. A
single product can have three or four prices depending on the form of money
used to pay.
The USD is perceived to be the strongest and holders of this
currency pay the lowest prices. Additionally many businesses index their products
to this currency.
Regulations that outlawed multi-tier pricing and USD
indexing have since been promulgated but this has not helped, businesses
continue to make reference to the USD when setting prices.
Electronic ZWL dollar
inferior to physical ZWL dollar
Next to be perceived as a strong form of money is the so
called bond note or the ZWL cash. It should interest the reader to know that even
prior to the belated no parity admission by the central bank back in February,
prices quoted in ZWL were higher than those quoted in USD. For nearly four
years, ordinary Zimbabweans understood this and went along with this set up. The
RBZ admission was academic, it did not change anything.
Ecocash and RTGS balances are at the tail of this spectrum,
they are perceived to be weakest forms money/currency in Zimbabwe. Consequently
prices that are quoted for items sold via Ecocash or bank transfer are much
higher than when they are paid for in ZWL cash.
This probably happens because just like the USD, the ZWL
cash is generally in short supply when compared with electronic balances held at
banks and Ecocash. As official accounts show, the electronic balances seem to
be growing all the time.
Sadly the law of supply and demand will still apply
regardless of central bank threats or sanctions. When there is too much money
chasing a few goods prices will rise and a currency will lose value. Therefore
as RTGS balances grow their value in real terms goes down.
In the case of USD and ZWL, the central bank eventually
relented and now it agrees that the latter is inferior. Yet somehow the central
bank still refuses to accept the fact that electronic ZWL balances are inferior
to ZWL hard cash, which is in short supply. This reality has subsisted for more
than four years and this state of affairs also helps to explain why Zimbabwe
has multiple exchange rates. But what prompted a return of this economic
malaise last seen in 2008?
Well, it seems things started going south once the local
currency was brought back into circulation after an eight hiatus.
Premature return of
Zimdollar
While the ongoing blame game has reached fever pitch, it is
the RBZ that should take the fall for the currency mess because by prematurely
bringing back the local currency, it created a favorable environment for the
money launderers and speculators that now it blames for manipulating currency
markets.
Zimbabwe dollarized in 2009 because its local currency had
become worthless and confidence in the central bank had disappeared among many
reasons.
However, it should be noted that dollarization came at a
great cost, it curtailed the central bank’s ability to influence economic
activity. Indeed between 2009 and 2013, the RBZ was a mere spectator in the
economy while corrupt politicians could not use it as a vehicle to enrich
themselves.
Everything seemed to flourish until when the local currency was
brought back into the equation.
Now as the local currency looks destined for another
collapse it is imperative for Zimbabweans to understand that there is a need to
explore a different currency solution.
The crypto
alternative
Cryptocurrency appears to be the answer, whether it is a
central bank digital currency (CBDC) or a privately issued currency, the
country has to move away from a flawed system that only serves the interests of
the few.
If Zimbabweans were to adopt a cryptocurrency that is underpinned
by the blockchain, it will not be possible for any central authority to
manipulate such a currency. The blockchain technology is designed to pre-empt the
RBZ from curtailing or shutting down part of the financial system as it has
done with Ecocash.
A cryptocurrency is immutable meaning it will not be
possible for any one authority to replicate notes a practice that was uncovered
a few months ago. Apparently there are several 5 dollar notes bearing the same
serial number that are in circulation and this is something that shatters
confidence in a currency.
With a cryptocurrency everyone including governments will be
forced to live within their means as it should be. Zimbabweans need to take
just charge of their future by asking government to abandon the flawed fiat
money in favour of cryptocurrency.
Confidence in the central bank alone is no longer enough to
support a currency.
