Measures to Deal With Cash Shortages in Zimbabwe
May 10, 2016
Persistence Gwanyanya
Zimbabwe Herald
1. Background
In response to the cash challenges on both local (ZETSS) and foreign payment platforms (NOSTRO), RBZ has come up with an array of measures to deal with this economic adversary whilst also stabilisation the economy. These measures include; Restoration and promotion of the multiple currency system
Foreign Exchange Stabilisation and Incentive Support Facility of US$200m
Promotion of efficient and Productive Utilisation of Foreign Exchange
Revision of the Cash Export and Withdrawal Limits
Proposal for multiple currency pricing systems
Enhanced Use of Electronic Payments for Local Transactions
Configuring RTGS System into Multi-currency
Promotion of Financial Inclusion
Promoting Savings Culture
2. Analysis of the specific measures
Restoration of the multiple currency system
This entails conversion of 40% of all new USD foreign exchange receipts from export of goods and services, including tobacco and gold sale proceeds by RBZ Bank at the official exchange rate to Rands and 10% to Euros.
The rational for this policy is to reduce dollar dominance in the basket of currencies (RBZ estimates that 95% of transactions were in US dollar in 2016)
This will reduce inordinate exposure to the US dollar.
My analysis is that the fear for inordinate exposure to the US dollar comes on the backdrop of increased scrutiny by the US in the transactions involving its currency.
There Government might have engaged in some unconventional funding mechanisms with ZETSS balance.
If for any reason there is a fallout with the Fed Reserve Bank, the danger of collapse of the payment system is high hence the intervention.
My view is the new policy may not be well received because of high preference of dollar in Zimbabwe.
I think there is a misconception that because there is high trade between South Africa and Zimbabwe there should be high usage of rand in Zimbabwe. A look at the 5 commodities that contribute more than 80% of the country’s exports (tobacco, gold, platinum, diamonds and ferrochrome) reveal that there is indeed high usage of USD than ZAR in Zim despite that trade might have happened through South Africa.
The policy is most likely to drive away US dollars from the formal sector which will exacerbate the liquidity situation as has happened before.
There is a possibility that the Government wants to set platform of making the Rand the anchor currency thus replacing the US dollar. The advantage for business is may create a case for wage reduction the motivation being that they will be trying to match wages in South Africa.
This will also create a case for price reductions in line with South Africa prices. This way the country will be able to deflate the economy and improve competitiveness.
However, the possibility of joining the Rand Monetary Union is low because this may require South Africa to scrutinise the country’s fiscal activities (mainly expenditures and revenues). This may not be liked by our authorities for sovereignty reasons.
Foreign Exchange Stabilisation and Incentive Support Facility of US$200m
A facility of US$200m has been established with Afreximbank to liquefy the economy.
The question is why the RBZ preferred this facility to be availed locally in form of bond notes (US$2; US$5; US$20) and why the country didn’t import the physical US dollars.
The rational for bond coins might have been so that they are not exported given the high levels of externalisation of money in the economy and also given that the money is not a result of any value creation – it’s simply a loan which needs to be paid back.
However, one cannot rule out the possibility that the people will simply exchange them for the US dollar and still externalise the US dollar.
The other danger is that since these bond notes cannot be used outside Zimbabwe they will be less preferred than the rand giving a possibility of emergency of black market where the US dollar is bought a premium-underlying the theory that bad money drives out good money.
There is a possibility that the Government may print more than the US$200m facility.
This may be the other reason why RBZ now want to reduce its exposure to the US dollar-to run away from scrutiny
The issue about the incentive of 5% (US$10m) further raise the suspicion that Government has the intention to print bonds more than the facility level
However one may argue that the incentive is being availed as cost of importing cash has been avoided through printing of the coins locally (a better analysis would have been possible if that cost is known)
RBZ should clear out that fear
Promotion of efficient and Productive Utilisation of Foreign Exchange.
Due to shortage of cash the RBZ has come up with priority list on competing uses of the same
This list is in three categories namely the top priority, middle priory and no priority category
Top priority list include;
i. Net exporters who import raw-materials or machinery to aide them to produce and generate more exports;
ii. Non-exporting importers of raw materials and machinery for local production (value addition) that directly substitute import of essential finished goods;
iii. Imports of critical and strategic goods such as basic food stuffs and fuel, health and agro-chemicals granted these goods are not available locally;
iv. Repayments of offshore lines of credit procured to fund productive activities;
v. Payments for services not available in Zimbabwe;
vi. Foreign investment income remittances (profits and dividends).
Medium priority list
Bank borrowing clients in the productive sector who engage in critical and strategic imports.
Low priority list
i. University and college fees for students already enrolled in courses abroad.
ii. Cash depositing clients in the retail and wholesale service industry. The customers generate cash which can either be recycled for local use or repatriated to replenish nostro accounts.
iii. Other borrowing clients who have engaged in the importation of non-strategic goods.
No priority list
i. Capital remittances from disposal of local property
ii. Capital remittances for cross border investments
iii. Funding of offshore credit cards
iv. Importation of trinkets and/ or goods or services readily available in Zimbabwe including non-commercial vehicles, maheu, bottled water, vegetables.
v. Donations
For some this reminds them of the Zimbabwe dollar era where controls led to black market and externalisation of funds
Imagine an earner of foreign currency who fails to pay for his children school fees because it’s in the low priority list
This may lead to externalisation of foreign currency thus militating against efforts to reduce this economic adversary.
However we understand that what necessitated these controls is the shortage of liquidity in the economy.
Revision of the Cash Export and Withdrawal Limits
The cash withdrawal limits;
i. USD 1 000
ii. EURO 1 000
iii. RAND 20 000
The maximum cash that can be taken outside the country has also been revised down from US$5,000 as follows;
i. USD 1 000
ii. EURO 1 000
iii. RAND 20 000
The rational, according to RBZ, is to align with international best practice.
While that may sound economically sensible there is danger that it may will lead to a run on deposits as people increasingly loss confidence with the system (this has already started).
These cash withdrawal limits would be more acceptable if the use of plastic money was high
Bizarrely, whilst the RBZ has reiterated the need to transform the economy into a cashless society, little precious action is being taken.
Proposal for multiple currency pricing systems
The thrust towards multiple currency system will entail that complimentary pricing system are put in place to support policy application and effectiveness.
RBZ suggest that the ideal situation is to have pricing which is reflective of the multiple currency system and since the bulk of our merchandise is sourced from South Africa, need to be reflective of the multiple currency system is necessary
According to RBZ it is pertinent that shop owners and businesses should think in Rand terms as opposed to abstract USD prices.
Again, my view is that the intention of this proposition is to reduce dollar dominance in Zimbabwe – for the reasons already alluded to.
We are likely going to see a scenario where buyer would want to use the rand and bond coins and notes to reduce their holding of the same, ostensibly because they are not preferred currencies to the USD.
Shops may then seek to exchange mainly bond coins for the real money driving up the demand for USD and Rand for use in their merchandise (this is unlike the current situation where allocation of foreign payments depended on each individual bank’s systems in place)
Banks will have to use the priority list on applications for all imports and these shops may not be comfortable with this.
This will trigger them to hold back their USD sales and find other ways of bringing their merchandise in the country.
Enhanced use of electronic payments for local transactions
All retailers, wholesalers, businesses, local authorities, utilities, schools, universities, colleges, service stations, Government departments & parastatals, informal sector among others are, with immediate effect required to install and make use of the requisite POS machines, so as to reduce the demand for cash in the economy.
This directive is long overdue-it should have been implemented at or immediately after dollarisation – there is need to catch up and cover the lost ground.
Meaning that more ground work needs to be done to transform this economy towards a cashless society
There is need of intensive awareness campaigns
In a cashless economy, demand for physical cash balances is low and more stable.
Monetary policy is more effective in such an environment.
The concerns that RBZ might have tampered with some ZETSS balances would not have been a big issue if the was high usage of plastic money-it’s possible to create virtual money when demand for physical cash balance is low.
However, outdated, archaic payment systems will weigh down efforts towards creation of a cashless society the ideal of a cashless society will remain a pipeline dream.
Meaning business, Government, and RBZ should invest in efficient systems.
Given scarce financial resources RBZ should seriously convince business to invest in these system otherwise the idea of a cashless society will remain a pipeline dream
SADC Regional Payments
For the country to fully benefit from the SADC infrastructure, all payments destined for South Africa and other participating countries should be executed through SIRESS.
This follows the live launch of the SIRESS system in 2013, where Zimbabwean banks are already participants on the regional system which settles in South African Rand (ZAR).
Again this is seen as a move to promote rand usage in Zimbabwe.
Configuring RTGS system into multicurrency
RBZ advised that following its announcement in the January 2016 Monetary Policy, the process to configure the RTGS system into multi-currency is already underway. Initially the following currencies will be enabled in addition to the existing USD:
i. ZAR (South African Rand)
ii. EUR (Euro currency)
iii. BOND Currency
The system will go live on 13 June 2016. The impact of this is that it will reduce exchange rate risk in payments.
General comment
The country is facing liquidity challenges of historic proportions
This reflects the unbalanced state of the economy which is characterised with low saving, production, investment (both foreign and local) against high levels of consumption and imports.
This imbalance is exacerbated by the increased incidences of illicit financial flows.
The analysis of the measures by RBZ to improve the country’s liquidity position should consider how these measures will correct this imbalance and the attendant factors that lead to out-lows of liquidity together with how they will address the illicit financial flows.
The thrust of a cashless society (plastic money) is plausible.
However, the efficacy of other policy measures remain highly debatable
There is clear intention for promotion of increased rand usage in the country, ostensibly to reduce inordinate exposure to the USD – for reasons best known to RBZ – despite the fact that the USD is the most preferred currency in Zimbabwe.
The biggest issue is that we are moving away from a free market economy to a controlled economy and our experience prior dollarisation tells us how controls are undesirable.
This will exacerbate rather than reduce illicit financial flows and create arbitrage opportunities which will take away money from productive uses in search of these opportunities.
The idea of bond notes sounds noble on paper because they are backed with a facility from Afreximbank. However these bond note will only liquefy the local economy and can’t be used for foreign payments.
There tendency by the general public is to question the reason for not bringing in cash from the facility to support the country’s liquidity position.
This give rise to suspicion that the Government may print more bonds than could be supported by the facility.
There is also a big question mark as to why all of a sudden the case crises has become more intensive to warrant such radical policies.
Only the Governor and God knows.
I thank you.
Persistence Gwanyanya is an Economist and Banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity and this article does not represent the views of his employer. For feedback you can use my email address percygwa@gmail.com or WhatsApp me on +263 773 030 691.
Persistence Gwanyanya
Zimbabwe Herald
1. Background
In response to the cash challenges on both local (ZETSS) and foreign payment platforms (NOSTRO), RBZ has come up with an array of measures to deal with this economic adversary whilst also stabilisation the economy. These measures include; Restoration and promotion of the multiple currency system
Foreign Exchange Stabilisation and Incentive Support Facility of US$200m
Promotion of efficient and Productive Utilisation of Foreign Exchange
Revision of the Cash Export and Withdrawal Limits
Proposal for multiple currency pricing systems
Enhanced Use of Electronic Payments for Local Transactions
Configuring RTGS System into Multi-currency
Promotion of Financial Inclusion
Promoting Savings Culture
2. Analysis of the specific measures
Restoration of the multiple currency system
This entails conversion of 40% of all new USD foreign exchange receipts from export of goods and services, including tobacco and gold sale proceeds by RBZ Bank at the official exchange rate to Rands and 10% to Euros.
The rational for this policy is to reduce dollar dominance in the basket of currencies (RBZ estimates that 95% of transactions were in US dollar in 2016)
This will reduce inordinate exposure to the US dollar.
My analysis is that the fear for inordinate exposure to the US dollar comes on the backdrop of increased scrutiny by the US in the transactions involving its currency.
There Government might have engaged in some unconventional funding mechanisms with ZETSS balance.
If for any reason there is a fallout with the Fed Reserve Bank, the danger of collapse of the payment system is high hence the intervention.
My view is the new policy may not be well received because of high preference of dollar in Zimbabwe.
I think there is a misconception that because there is high trade between South Africa and Zimbabwe there should be high usage of rand in Zimbabwe. A look at the 5 commodities that contribute more than 80% of the country’s exports (tobacco, gold, platinum, diamonds and ferrochrome) reveal that there is indeed high usage of USD than ZAR in Zim despite that trade might have happened through South Africa.
The policy is most likely to drive away US dollars from the formal sector which will exacerbate the liquidity situation as has happened before.
There is a possibility that the Government wants to set platform of making the Rand the anchor currency thus replacing the US dollar. The advantage for business is may create a case for wage reduction the motivation being that they will be trying to match wages in South Africa.
This will also create a case for price reductions in line with South Africa prices. This way the country will be able to deflate the economy and improve competitiveness.
However, the possibility of joining the Rand Monetary Union is low because this may require South Africa to scrutinise the country’s fiscal activities (mainly expenditures and revenues). This may not be liked by our authorities for sovereignty reasons.
Foreign Exchange Stabilisation and Incentive Support Facility of US$200m
A facility of US$200m has been established with Afreximbank to liquefy the economy.
The question is why the RBZ preferred this facility to be availed locally in form of bond notes (US$2; US$5; US$20) and why the country didn’t import the physical US dollars.
The rational for bond coins might have been so that they are not exported given the high levels of externalisation of money in the economy and also given that the money is not a result of any value creation – it’s simply a loan which needs to be paid back.
However, one cannot rule out the possibility that the people will simply exchange them for the US dollar and still externalise the US dollar.
The other danger is that since these bond notes cannot be used outside Zimbabwe they will be less preferred than the rand giving a possibility of emergency of black market where the US dollar is bought a premium-underlying the theory that bad money drives out good money.
There is a possibility that the Government may print more than the US$200m facility.
This may be the other reason why RBZ now want to reduce its exposure to the US dollar-to run away from scrutiny
The issue about the incentive of 5% (US$10m) further raise the suspicion that Government has the intention to print bonds more than the facility level
However one may argue that the incentive is being availed as cost of importing cash has been avoided through printing of the coins locally (a better analysis would have been possible if that cost is known)
RBZ should clear out that fear
Promotion of efficient and Productive Utilisation of Foreign Exchange.
Due to shortage of cash the RBZ has come up with priority list on competing uses of the same
This list is in three categories namely the top priority, middle priory and no priority category
Top priority list include;
i. Net exporters who import raw-materials or machinery to aide them to produce and generate more exports;
ii. Non-exporting importers of raw materials and machinery for local production (value addition) that directly substitute import of essential finished goods;
iii. Imports of critical and strategic goods such as basic food stuffs and fuel, health and agro-chemicals granted these goods are not available locally;
iv. Repayments of offshore lines of credit procured to fund productive activities;
v. Payments for services not available in Zimbabwe;
vi. Foreign investment income remittances (profits and dividends).
Medium priority list
Bank borrowing clients in the productive sector who engage in critical and strategic imports.
Low priority list
i. University and college fees for students already enrolled in courses abroad.
ii. Cash depositing clients in the retail and wholesale service industry. The customers generate cash which can either be recycled for local use or repatriated to replenish nostro accounts.
iii. Other borrowing clients who have engaged in the importation of non-strategic goods.
No priority list
i. Capital remittances from disposal of local property
ii. Capital remittances for cross border investments
iii. Funding of offshore credit cards
iv. Importation of trinkets and/ or goods or services readily available in Zimbabwe including non-commercial vehicles, maheu, bottled water, vegetables.
v. Donations
For some this reminds them of the Zimbabwe dollar era where controls led to black market and externalisation of funds
Imagine an earner of foreign currency who fails to pay for his children school fees because it’s in the low priority list
This may lead to externalisation of foreign currency thus militating against efforts to reduce this economic adversary.
However we understand that what necessitated these controls is the shortage of liquidity in the economy.
Revision of the Cash Export and Withdrawal Limits
The cash withdrawal limits;
i. USD 1 000
ii. EURO 1 000
iii. RAND 20 000
The maximum cash that can be taken outside the country has also been revised down from US$5,000 as follows;
i. USD 1 000
ii. EURO 1 000
iii. RAND 20 000
The rational, according to RBZ, is to align with international best practice.
While that may sound economically sensible there is danger that it may will lead to a run on deposits as people increasingly loss confidence with the system (this has already started).
These cash withdrawal limits would be more acceptable if the use of plastic money was high
Bizarrely, whilst the RBZ has reiterated the need to transform the economy into a cashless society, little precious action is being taken.
Proposal for multiple currency pricing systems
The thrust towards multiple currency system will entail that complimentary pricing system are put in place to support policy application and effectiveness.
RBZ suggest that the ideal situation is to have pricing which is reflective of the multiple currency system and since the bulk of our merchandise is sourced from South Africa, need to be reflective of the multiple currency system is necessary
According to RBZ it is pertinent that shop owners and businesses should think in Rand terms as opposed to abstract USD prices.
Again, my view is that the intention of this proposition is to reduce dollar dominance in Zimbabwe – for the reasons already alluded to.
We are likely going to see a scenario where buyer would want to use the rand and bond coins and notes to reduce their holding of the same, ostensibly because they are not preferred currencies to the USD.
Shops may then seek to exchange mainly bond coins for the real money driving up the demand for USD and Rand for use in their merchandise (this is unlike the current situation where allocation of foreign payments depended on each individual bank’s systems in place)
Banks will have to use the priority list on applications for all imports and these shops may not be comfortable with this.
This will trigger them to hold back their USD sales and find other ways of bringing their merchandise in the country.
Enhanced use of electronic payments for local transactions
All retailers, wholesalers, businesses, local authorities, utilities, schools, universities, colleges, service stations, Government departments & parastatals, informal sector among others are, with immediate effect required to install and make use of the requisite POS machines, so as to reduce the demand for cash in the economy.
This directive is long overdue-it should have been implemented at or immediately after dollarisation – there is need to catch up and cover the lost ground.
Meaning that more ground work needs to be done to transform this economy towards a cashless society
There is need of intensive awareness campaigns
In a cashless economy, demand for physical cash balances is low and more stable.
Monetary policy is more effective in such an environment.
The concerns that RBZ might have tampered with some ZETSS balances would not have been a big issue if the was high usage of plastic money-it’s possible to create virtual money when demand for physical cash balance is low.
However, outdated, archaic payment systems will weigh down efforts towards creation of a cashless society the ideal of a cashless society will remain a pipeline dream.
Meaning business, Government, and RBZ should invest in efficient systems.
Given scarce financial resources RBZ should seriously convince business to invest in these system otherwise the idea of a cashless society will remain a pipeline dream
SADC Regional Payments
For the country to fully benefit from the SADC infrastructure, all payments destined for South Africa and other participating countries should be executed through SIRESS.
This follows the live launch of the SIRESS system in 2013, where Zimbabwean banks are already participants on the regional system which settles in South African Rand (ZAR).
Again this is seen as a move to promote rand usage in Zimbabwe.
Configuring RTGS system into multicurrency
RBZ advised that following its announcement in the January 2016 Monetary Policy, the process to configure the RTGS system into multi-currency is already underway. Initially the following currencies will be enabled in addition to the existing USD:
i. ZAR (South African Rand)
ii. EUR (Euro currency)
iii. BOND Currency
The system will go live on 13 June 2016. The impact of this is that it will reduce exchange rate risk in payments.
General comment
The country is facing liquidity challenges of historic proportions
This reflects the unbalanced state of the economy which is characterised with low saving, production, investment (both foreign and local) against high levels of consumption and imports.
This imbalance is exacerbated by the increased incidences of illicit financial flows.
The analysis of the measures by RBZ to improve the country’s liquidity position should consider how these measures will correct this imbalance and the attendant factors that lead to out-lows of liquidity together with how they will address the illicit financial flows.
The thrust of a cashless society (plastic money) is plausible.
However, the efficacy of other policy measures remain highly debatable
There is clear intention for promotion of increased rand usage in the country, ostensibly to reduce inordinate exposure to the USD – for reasons best known to RBZ – despite the fact that the USD is the most preferred currency in Zimbabwe.
The biggest issue is that we are moving away from a free market economy to a controlled economy and our experience prior dollarisation tells us how controls are undesirable.
This will exacerbate rather than reduce illicit financial flows and create arbitrage opportunities which will take away money from productive uses in search of these opportunities.
The idea of bond notes sounds noble on paper because they are backed with a facility from Afreximbank. However these bond note will only liquefy the local economy and can’t be used for foreign payments.
There tendency by the general public is to question the reason for not bringing in cash from the facility to support the country’s liquidity position.
This give rise to suspicion that the Government may print more bonds than could be supported by the facility.
There is also a big question mark as to why all of a sudden the case crises has become more intensive to warrant such radical policies.
Only the Governor and God knows.
I thank you.
Persistence Gwanyanya is an Economist and Banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity and this article does not represent the views of his employer. For feedback you can use my email address percygwa@gmail.com or WhatsApp me on +263 773 030 691.
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