Zimbabwe’s bottom dollar?

In the centre of shabby Harare it’s hard to know what is causing the most pain: runaway inflation and shortages of goods such as bread, or load-shedding, in effect for 18 hours a day. Then of course there are the fuel queues, which have been a daily fact of life for the past 10 months. In the midst of all this, the government’s June 24 ban on using foreign currency may make little immediate difference on the street.

Most urban Zimbabweans have no access to foreign currency; for more than two years, they’ve been using electronic cash (the real-time gross settlement, or RTGS, dollar) on their phones for shopping and for paying everything from school fees to taxi fare.

For the 60% of the population who live in the rural areas, however, the situation is different. They do use cash: US dollars, rands or bond notes — temporary printed money in denominations of $2 and $5. For change, they use coins, minted in SA. And, if they have no cash, they barter.

Not any more. A huge spike in the black-market exchange rate for the RTGS dollar against the US dollar sparked measures by the government to ban the use of forex locally. By the time the ban came — via a statutory instrument that few realise has no real legal force — the rate had reached about 14 RTGS dollars to the US unit, and was rising daily.

In contrast, the official rate of exchange, the interbank rate, was less than half that.

The devaluation of the local currency seems to have been driven, in part, by speculators buying dollars from banks and selling them on the black market at a much higher rate of exchange.

Then, as Institute for Security Studies analyst Derek Matyszak notes, there seem to have been businesses borrowing RTGS dollars from their banks to exchange for greenbacks on the black market. As the value of the RTGS currency dropped, the loans became cheaper to repay.

In addition to the forex ban, the government also zapped a 50% interest rate charge on such loans to mitigate the hike in the parallel exchange rate.

Less than a week after these measures were announced, the parallel rate for the RTGS dollar had strengthened to eight to the US dollar. Some bureaux de change, which reopened with new regulations, were selling US dollars at the same rate.

So, for now, finance minister Mthuli Ncube has achieved his aim of a stronger RTGS dollar. The next step, he says, is for Zimbabwe to relaunch its own currency.

But some say the situation is murky.

Economist John Robertson, for example, believes a country that lacks foreign reserves, as Zimbabwe does, "would have difficulty supporting the value of its own currency".

He says: "[Zimbabwe’s] net foreign assets in March came to -$5.9bn. No figures have been published since then, but the evidence supplied by the Reserve Bank of Zimbabwe’s March survey shows that net foreign assets in January came to -$1.8bn. So we added $4bn to our indebtedness in three months.

"I don’t think this is a good launchpad for a new Zimbabwe dollar."

Though Ncube warned last month that Zimbabwe would relaunch its own currency, no-one expected it to happen quite yet. So why the rush?

Tony Hawkins, a professor of economics in Harare, says the government realised rampant inflation meant it had to increase salaries for civil servants. But it "could not agree to do this in US dollars, which it does not have", he says. "The exchange rate was running away in the parallel market."

Many now hope the exchange rate will continue down to about four to one. This would reduce prices of many everyday goods, such as flour and milk, which are mainly imported from SA.

But the country’s shortage of foreign cash reserves and moves to create a new local currency have sparked fears of a repeat of 2008, when the Zimbabwe dollar was abandoned after it was rendered worthless by hyperinflation. It meant bank balances, retirement funds and mortgages lost all value.

There is also widespread mistrust on the streets, with rumours circulating that people of influence within the ruling Zanu-PF have privileged access to foreign currency — a charge denied by the central bank.

Many are also suspicious about why there is such a shortage of foreign currency this year. In 2018, a record $6bn was brought into the economy from exports and remittances from the diaspora (mostly in SA and overseas). And the government appears to have cut some costs.

But a commercial banker, who asks not to be named, says some exporters, anxious about exchange rate uncertainties and the lack of foreign cash, did not remit recent earnings.

He believes the highly active forex black market was a natural consequence of Zimbabwe’s past record. "There will always be speculators if there is a chance to make some money out of the exchange rate," he says.

"I hope this works. The ban on forex had to happen but clearly inadequate preparations were made."